If you got an extension and are completing your tax return for another year, searching for all available opportunities to save money and ensuring you meet all necessary requirements are both important. Consider the following strategies to lower your tax bill and maximize your return this year:
Determine Your Filing Status
The Internal Revenue Service (IRS) recognizes five filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow/widower with dependent child. You must mark your filing status on your personal income tax return form (Form 1040). Selecting the right status is important, the U.S. Tax Center explains, because one category may offer you more tax benefits than another.
Read through the criteria for each filing category carefully to determine which is most appropriate. For tax purposes, the IRS considers your marital status on the final day of the year as your status for the entire year. If you fall into more than one filing category, you can select the one with the smallest amount of tax due to maximize your return.
Gather All Relevant Financial Documents
Gathering all relevant financial documents as early as you can is the smartest strategy, according to Michael McDonald of Time Money. This early preparation can help minimize confusion about documents, especially in light of government changes, he explains. It also allows plenty of time for locating misplaced financial documents and reissuing any paperwork that’s been discarded.
Early document preparation also allows you to use a trained accountant’s services. McDonald explains that many accountants have no time to help clients who wait until the April deadline to commence the tax process.
Kerri Anne Renzulli, also writing for Time Money, notes that you’ll need the following documents to file your tax return:
- W-2 from employer
- Health insurance marketplace statement (1095-A)
- Miscellaneous income statement (1099-MISC)
- Stock transaction report (1099-B)
- Taxable interest statement (1099-INT)
- Capital gains and dividends report (1099-DIV)
- Distribution report (1099-R)
- Unemployment insurance statement (1099-G)
- Debt discharge statement (1099-C)
- Interest on mortgage statement (1098)
- Qualified education expense statement (1098-T)
- Interest on educational debt statement (1098-E)
Remember, some of these documents will not apply to every taxpayer. Only collect the ones that are relevant to your circumstances.
Organize Your Deductions
Organizing deductions is important for anyone preparing to file their taxes, according to Lisa Rabasca Roepe, writing for Forbes.
She interviewed Brian Ashcraft, Liberty Tax Service’s director of compliance, who suggested organizing receipts for the following purchases:
- Energy-saving appliances
- Office supplies
- Work-related subscriptions
- Educational courses related to your profession
- Charitable contributions
- Medical receipts if expenses exceed 10 percent of adjusted gross income for under 65s, or if expenses exceed 7.5 percent of adjusted gross income for over 65s
Experiment with various organization systems to find what works for you. You may file physical receipts in a central location or digitize them, if you prefer. Mobile applications like Shoeboxed and Expensify help taxpayers keep track of their expenses electronically. You could also photograph your receipts with your smartphone and store the images on a secure cloud-based server provided by Dropbox or Google Drive, for example.
Contribute To Your Individual Retirement Account
Contributing funds to your individual retirement account (IRA) is an excellent way to enjoy tax savings before filing your taxes, according to Dan Caplinger of The Motley Fool, writing for CNN Money. He notes that last-minute contributions can reduce the taxable incomes of people under 50 by as much as $5,500. Taxpayers 50 years and older can contribute up to $6,500 to their IRAs. Maurie Backman of Newsweek notes that a $5,000 contribution provides a $1,250 tax saving.
Contribute to a Health Savings Account
Taxpayers eligible for a Health Savings Account (HSA) can also increase their tax savings by making contributions through the tax filing deadline, notes Caplinger. The IRS lists criteria for establishing a HSA:
- You must be covered under a high-deductible health plan (HDHP) on the first day of the month
- You cannot have other health coverage, except permitted coverage specified by IRS
- You cannot have Medicare
- You can’t be listed as a dependent on someone else’s latest tax return.
The IRS website states that taxpayers can claim tax deductions for contributions made in this tax-exempt trust or custodial account even if they aren’t itemized on Schedule A (Form 1040). These contributions will stay in your HSA until you use them for eligible medical expenses.
Review Your Previous Returns for Unclaimed Benefits
Reviewing your tax returns from previous years can help you identify tax benefits you didn’t claim. For example, the IRS website explains that eligible taxpayers who didn’t claim their earned income tax credit can file an amended return for this credit within four years. It adds that in most cases, taxpayers have three years from their original filing date to file an amendment — or two years from the date they paid tax, if this date is later.
Use Form 1040X to file a tax amendment. The IRS only accepts paper forms for tax amendments. You cannot file an amendment electronically.
Tax Return Help Is Available
Even people with a background in finance can feel overwhelmed as they get close to completing their tax returns. Caplinger says taxpayers should always remember that help is at hand.
Professional tax preparers may offer assistance, although Caplinger admits that it becomes increasingly difficult to schedule appointments with them as the national tax deadline approaches. Fortunately, there are alternatives for people who cannot see an accountant.
The Volunteer Income Tax Assistance (VITA) program has trained IRS-certified volunteer tax preparers who can answer basic income tax inquiries and help prepare tax documents. The volunteers can even draw your attention to eligible tax benefits you might otherwise overlook. The program also helps taxpayers access electronic filing, which can streamline the process and help taxpayers receive their refunds sooner.
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