The federal law requires taxpayers to pay for their federal income tax gradually during the course of the tax year. How much tax you pay before filing a tax return determines the amount you will get in tax refund but you shouldn’t withhold excessively. There is a lot that goes into a tax refund than just the taxes you paid.
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In all cases, you should maximize tax refund by claiming every bit of deduction and credit that is available to you. By doing this, you will pay less tax. While you do so, the taxes you withheld or paid will increase the likelihood of maximizing your tax refund. But before we get to tax deductions and credits, let’s take a look at how we pay taxes in the United States.
If you’re an employee, working for an employer, your employer will withhold tax from your income and forward it to the IRS. On the other hand, if you’re self-employed, you will have to make estimated tax payments. At the end of every quarter, you must file Form 1040-ES to estimate the owed taxes and pay the IRS.
After the year ends and the tax season begins, you will file a Form 1040 to see whether or not you owe taxes to the IRS or get a tax refund. This is the only way you can figure out your tax refund. If you’re happy with the outcome, do the same next tax year. If not, follow our tips below.
Deductions to Maximize Tax Refund
When claiming deductions on a tax return, you have two main options. Either take the standard deduction or itemize. You should always see both deductions for yourself to see which one reduces taxable income the most. Oftentimes, taxpayers miss a few tax deductions that are available to them. Since the IRS won’t point out these tax deductions for you, they will be gone for good.
Learn more about 2021 standard deduction.
With that said, you should have a strong knowledge of the deductions that you can claim. The best way to see the itemized deductions you can claim is filing a tax return electronically.
Tax software like TurboTax searches tax deductions and credits you can claim for you. If you have limited expenses, you can claim the following itemized deductions.
- Medical Expenses
- Retirement Account (IRA, 401k) Contributions
- Mortgage Interest
- Student Loan Interest
- Property, State and Local Income Taxes
- Charitable Contributions
Given there are over 350 of these combined with tax credits, it is hard to find out which deductions you can claim. Thanks to the features tax software provide us with, filing a tax return electronically is going to help figure out. Thus, maximizing tax refund.
Tax Credits to Reduce Taxes Owed
While tax deductions reduce the income you will be taxed, the tax credits reduce the amount you actually owe to the IRS. You can think of tax credits as direct discounts you get on your tax bill.
The best thing about tax credits is some of them are actually refundable. A refundable tax credit increases your tax refund. For example, the child tax credit is a $2,000 tax credit. If you don’t owe taxes, as much as $1,400 of it is refundable. What portion of this $1,400 will be refundable depends on your income.
Learn more about child tax credit.
Although the amount of a tax refund is mostly related to the taxes paid during the course of the tax year, how much you owe in taxes is what also matters. Since the taxes owed has a direct relation with the deductions and credits, you should maximize these first to get a hefty tax refund.
Everything mentioned above applies to the 2021 tax season since there haven’t been many changes in the tax code. Read our other tips to increase tax refund and catch up on tax changes on our homepage.