For tax purposes, there are steps you can take before December 31, that could significantly increase your tax refund. While it is common to avoid tax topics until January, taking a few calculated measures now could pay off big in the New year.
Here are a few simple strategies that could increase your refund and leave more money in your pocket to start the new year.
- Estimate Your Income and Deductions. Review your last pay stub and see what your totals for the year are to get an idea of your annual earnings and how it compares to previous years. Then consider the past year. Have you had unusual expenses that might be deductible? Events like a move, marriage, divorce, or birth of a child will all impact your tax picture and could lead to changes in deductions and credits. Have you had higher medical expenses that maxed out your deductible? Have you changed jobs, received a promotion, or experienced a layoff. Sometimes you can stack deductions in one year, leading to lower taxes and a bigger refund. For example, if you maxed out your health insurance deductible, take care of other medical needs before the end of the year to lower out of pocket costs. When health care expenses exceed 10% of adjusted gross income (AGI) you gain an additional deduction for medical expenses.
- Gather Documents. You can only deduct expenses you track through record keeping. Gather receipts and other tax documents and put them in one place. You may track expenses through an online spreadsheet or accounting program, but you must also keep readable receipts to prove the expense is a legitimate deduction. Making copies or scanning receipts will keep everything legible and enable you to go paperless if you choose. For example, if you want to deduct miles for charity work or business, you must maintain a written record. If you want to deduct unreimbursed business expenses, you must keep receipts and write notes about how you used the expense for business purposes. By sorting through your rough numbers now, you will be able to make better decisions about what steps will add up to the highest savings.
- Reduce Income. Taxable income determines your tax bracket, tax credits, qualifying for earned income credit, healthcare savings credit, and other factors that directly impact your return and your refund. Here are a few easy strategies to reduce income before the end of the year.
- Defer your end of year bonus. Taking the bonus in January will decrease your taxable income this year, although it could increase it for the next tax year.
- Increase your 401K contribution. Most 401K’s contributions directly reduce income at the time of the contribution. The only exception is if you contribute to a Roth 401K. You can add up to $18,000 to your 401K each year and $24,000 if you are over 50. By increasing contributions with a large sum (perhaps using money from your bonus), you will increase your retirement savings while reducing taxable income.
- Increase IRA contributions. Traditional IRA contributions have the same effect as 401K contributions, with regard to reducing taxable income immediately. You have until April 15th to make IRA contributions for this tax year. These deposits are one of the few strategies you can use after December 31.
- Sell poor performing investments. Investments outside of retirement or other tax beneficial accounts owe taxes in the year of the gain. You pay taxes when you sell an investment or when an account pays dividends. Mutual funds can owe taxes each year, even when you continue to hold the fund. For tax purposes, you can use losses to offset gains, by selling poor performing stocks and reduce taxable income.
- Increase Deductions. When filing taxes, there are two types of deductions, above the line and below the line. You can take above the line deductions even if you do not itemize your taxes. Below the line requires itemization.
Increasing above the line deductions will directly reduce your adjusted gross income (AGI). Here are a few you can qualify for if you act before December 31.
- Pay for school. Educational classes, including college tuition and fees paid before December 31, are deductible as long as you do not qualify for the tax credits (which are worth more). Even though the spring semester starts in January, paying the bill in December could lower your tax bill.
- HSA contributions. Those with high-deductible health care plans can add money to a Healthcare Savings Account (HSA) and get a tax deduction, tax-free growth, and tax-free withdrawals as long as the money pays for qualified healthcare expenses. If you want to increase your refund, you can add up to $6,750 for each individual and another $1,000 for those over 55.
- Pay additional student loan interest. Making an extra payment or two towards your student loan interest will increase the interest paid, which you can deduct and effectively lower taxable income.
Increasing itemized deductions will also increase your refund, for families who have enough deductions to itemize.
- Pay property taxes this year. In most counties, annual property taxes are due in September or October, but interest does not begin to accrue until January. A payment must credit to your account by December 31 to qualify for a tax deduction this year. Those with escrow accounts get the deduction each year because the bank pays when the bill arrives.
- Increase charitable deductions. Cash contributions to a charity are deductible up to the last day of the year. Other donations such as cars, stocks or items which require a sale may take more time to get the credit for tax purposes.
- Increase mortgage interest by making an extra payment. An extra mortgage payment each year could pay off the loan years sooner, and give you extra interest to deduct when you are ready to file taxes. If you do not have enough to make an extra payment, paying January’s payment in December will accomplish the same thing and give you extra cash in January when the holiday credit card bills come in.
We all want to pay Uncle Sam less and taking a few proactive steps in December, can reduce your taxable income and effectively increase your refund.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a free financial analysis.
Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high-interest credit card debt any longer.