It’s tax season and, with the current record-high prices for everything from rent to groceries, families across the country are looking for ways to get a little bit of extra cash come April 18. The good news is there are several ways to maximize your refund or lower your tax bill and get back everything you’re owed from the IRS. However, it’s important to start early and map out your tax plan before you file.
“Some of these items require planning during the year you expect to take the deduction,” Russell Ephraim, CPA, Managing Director at CBIZ Marks Paneth explained. “Planning ahead can either help avoid a hefty tax bill come April or provide an idea of what your refund will be so you can plan accordingly.”
As you focus on your taxes, here are five areas to focus on to help limit your tax liability and, hopefully, score a nice refund from the IRS.
1. Consider Your Filing Status
Your filing status determines the amount of the standard deduction you can claim. For most married couples filing jointly is the best bet and provides the highest standard deduction, but there are some instances where the married filing separately status is the right choice.
Some expenses can only be used as deductions if they exceed 7.5% of your adjusted gross income (AGI). If one spouse has extensive medical expenses or other deductions that surpass that threshold, filing separately could lower your AGI and allow you to deduct more of those expenses than if you filed together.
Filing separately does preclude some credits, though — the Child and dependent care credit, Earned income tax credit (EITC), and American Opportunity or Lifetime Learning educational credits may not be available for those filing separately. If you would otherwise be eligible for those credits, do the math both ways and see which benefits you most before you file.
For divorced couples, the custodial parent can file as head of household and receive a larger standard deduction than they would receive by filing as single.
2. Itemize Deductions
The standard deduction increased significantly in 2017, so people aren’t itemizing as much as they used to. When choosing whether to itemize or take the standard deduction, it’s important to do the math.
“Parents should take whichever deduction is higher,” said Ephraim. “When preparing your taxes, you or your tax advisor should always calculate the itemized deduction amount available to determine if it is more beneficial than the standard deduction.”
If you have extensive charitable contributions, medical expenses, mortgage interest, real estate taxes, state or local taxes, or other deductible expenses that exceed the standard deduction for your filing status, go ahead and itemize them instead of the standard deduction.
You may also be able to deduct certain work-from-home expenses. “Families can maximize their refunds by ensuring they take advantage of all the deductions available to them,” said Ephraim. “With many new parents working from home for at least some part of the week, certain deductions for business use of home may be available to them, especially if the taxpayers are running their own business.”
3. Max Out Your Retirement Contributions
Investing in a traditional IRA is a great way to not only save a retirement nest egg but also lower your tax and maybe get you over the line into refund territory. Contributions to IRAs are deductible and will lower your adjusted gross income. You have until the filing deadline (April 18, 2023) to max out contributions for the 2022 tax year — those under 50 can contribute up to $6,000, and those 50 and older can contribute up to $7,000. Note that only contributions to traditional IRAs are deductible, not Roth IRAs.
4. Take Advantage of Credits
Credits are valuable tools for lowering liabilities and boosting refunds and there are numerous available to families that, unlike deductions which reduce the income you are taxed on.
will decrease your federal income tax on a dollar-for-dollar basis.
Families, Ephraim explains, should claim the child tax credit, which can be as much as $2,000 per child for most families. The dependent care credit is also available for families paying for childcare while both parents are working or looking for work.
He adds that new families buying their first home should check with their advisor if they’re eligible for the first-time home buyers credit, which can be as much as $15,750 for first-time home purchases in 2022.
Keep an eye out for what credits may apply, as you’ll be leaving money on the table if you’re not careful.
5. Dial In Your Health Savings Account
Health savings accounts provide a triple tax benefit — the contributions are deductible, the invested funds grow tax-free, and withdrawals are tax-exempt when used for qualifying medical expenses.
Similar to a traditional IRA, contributions to qualified HSAs are capped each year — $7,300 for family plans and $3,650 for single plans.
Working on your 2022 return is a great opportunity to plan your strategy for next year’s tax season. Map out your ideas and get the ball rolling on changes like IRA and HSA contributions that will make a big impact on your 2023 return.