Tax season is here and everyone is looking for ways to make the most of their 2022 tax return. But what exactly is a tax return and how can filers get the guaranteed most back? There are a few strategies to keep in mind as you look to get the biggest refund possible and a few suggestions on how you should use that refund. If you want to go beyond this year’s tax refund and minimize taxes on your long-term financial plan, your best bet is to find a financial advisor, like the ones here at South Bay Credit Union.
What Is A Tax Return?
A tax return is a form or forms filed with a tax authority that reports income, expenses, and other relevant tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes. In most countries, tax returns must be filed annually for an individual or business with reportable income, including wages, interest, dividends, capital gains, or other profits. In the United States, tax returns are filed with the Internal Revenue Service (IRS) or with the state or local tax collection agency containing information used to calculate taxes. Tax returns are also generally prepared using forms prescribed by the IRS or other relevant authorities.
How Can I Receive The Most Back?
Want to get a big tax refund this tax filing season? You can minimize your tax liability and potentially snag a larger refund by taking advantage of every possible tax break.
First, consider your filing status. Your filing status can have a significant impact on your tax refund, regardless of whether you’re single or married. For most married couples, it makes sense to file jointly. However, there are some situations where you should consider filing separately. For example, if you or your spouse has a significant amount of medical or business expenses, filing separately may reduce your adjusted gross income and increase the amount you can deduct (because these deductions can only be taken if they exceed a given percentage of your income). On the other hand, filing separately means you may miss out on some key tax credits. Run the numbers to see which filing status yields the bigger benefit. And if math isn’t your cup of tea, you can estimate your return easily with a free tax return calculator.
Next, you should go over any credits you or your spouse (if filing jointly) may have. A tax credit reduces the amount of tax you owe to the IRS on a dollar-for-dollar basis. If you owe $6,000 in taxes and claim a credit worth $1,000, your bill drops to $5,000. Certain credits may even be refundable, which means you can claim them even if you don’t have any tax liability. Your eligibility to claim these and other tax credits typically depends on your income, filing status, and whether or not you have eligible dependents.
According to the IRS, some of the most common tax credits include:
- The Earned Income Tax Credit allows qualified tax filers to claim up to $6,728 for three or more qualifying children in the tax year 2021 and $6,935 in the tax year 2022.
- The Child and Dependent Care Credit can provide up to $8,000 in tax credits for qualified filers with one child or dependent in 2021 and up to $16,000 for those with multiple children or qualifying dependents. This credit helps reimburse child care expenses incurred during the tax year.
- The Child Tax Credit is worth up to $3,600 per dependent for the tax year 2021, but your income level determines exactly how much you can get. In past years, the credit was $2,000 per dependent.
To maximize your return, it’s also important to not forget any deductions. In terms of your tax refund, credits typically yield a bigger tax return than deductions. But that doesn’t mean you should overlook write-offs you may qualify for. Instead of reducing the amount of tax you owe, deductions reduce the amount of income that is subject to tax.
When you file your taxes, you have to decide whether to take the standard deduction or itemize. Itemizing becomes the smarter choice when you have a lot of deductible expenses. This includes business expenses like mileage and lodging, home office expenses if you’re self-employed, donations to charitable organizations, mortgage interest, student loan interest, and even gambling losses. The amount of each expense you can deduct does vary. It’s also important to make sure you have appropriate records to prove your claim, like receipts or bank statements.
What Should I Do With My Return?
Sometimes saving money can be challenging. A tax refund is a great opportunity to set yourself up for a better position in the future. If you’re getting a windfall from the IRS, here are a few tips to make sure your money continues to work for you.
- Create an emergency fund: Many Americans don’t have a savings account accessible in case of sudden financial need. A lack of savings leaves you vulnerable to a job loss, medical emergency, or major repair and can force you to seek out short-term loans at high-interest rates or carry credit card balances for an extended period. Using your refund to start or further, an emergency fund could leave you breathing easier should one of those events arise.
- Pay off debts: If you are carrying a credit card balance, consider using your tax refund to pay that off. Consolidating your debt now allows you to put more money in the bank every month once those minimum payments vanish from your list of bills.
- Prepay your rent/mortgage: Making extra payments on your rent or mortgage can be a great way to save money over the long term. For mortgages, so much of your payment on a long-term note goes to pay off the interest, reducing the principal can have an exponential effect on the life of the loan. Even an extra payment or two now can make a big difference in your future obligation to the bank.
- Make home improvements: If you live in an older home, spending some of that refund around the house can lower energy bills. Replacing old windows can improve the efficiency of your air conditioning in the summer and reduce your electric bill. Old appliances can be replaced by models that use less energy. If your kitchen or bathroom is out of date a remodeling project can improve the functionality of your house now and also make it more attractive when you decide to sell.
- Invest in life insurance: Life insurance can be easy to overlook, particularly for younger workers confident that they have plenty of time to worry about that. For those who are married with families, a term life policy can provide protection for loved ones at a relatively low cost. Your tax refund can allow your family to maintain its standard of living if the unthinkable happens for a few hundred dollars.