You might think it’s too early to think about tax refunds, which are usually issued in the spring after you’ve filed your federal and state income tax returns. But there are things you can do now to potentially increase the size of your tax refund next spring.
Here are 5 things you can do now to possibly maximize your 2021 tax refund.
- Reconsider your tax filing status. Your choice of filing status can affect the size of your tax refund, especially if you’re married. The vast majority of married taxpayers choose to file a joint tax return, but filing separately can result in a larger tax refund in certain circumstances, such as if one spouse has excessive medical expenses like COBRA payments this year. Note that the Child Tax Credit is available to married couples filing separately if at least one of the filer’s has adjusted gross income (AGI) of less than $200,000. For tax year 2021, this credit is raised from $2,000 per qualifying child to between $3,000 and $3,600 per qualifying child, depending on the child’s age (up to age 17). Meanwhile, if you’re unmarried, you might be able to boost your tax refund by filing as a head of household instead of as a single. The head of household filing status offers a higher standard deduction and lower tax brackets than the single status. Your tax savings and tax refund could be even greater if you can claim a qualifying dependent, such as a child or elderly parent you support financially.
- Look for hidden deductions. With the higher standard deduction, most taxpayers now choose to claim this instead of itemizing deductions. Before deciding on your strategy, however, you should see if there are hidden deductions you might qualify for that would make itemizing pay off for you in the form of a larger tax refund. One of the most commonly overlooked deductions is state income tax or sales taxes you paid — you can deduct whichever of these is higher. This could be especially beneficial if you paid sales tax on a big-ticket item this year, like a new car or boat. Job search expenses, mortgage points, out-of-pocket charitable contributions, interest paid on student loans and the home office deduction for self-employed individuals are other deductions that could boost the size of your tax refund.
- Maximize tax credits. Tax deductions are nice, but tax credits have the potential to boost your tax refund even more. This is because tax credits lower your tax liability on a dollar-for-dollar basis while tax deductions just lower your taxable income. The Child and Dependent Care Tax Credit is available to many households where both spouses work and a caregiver is paid. This credit for qualifying expenses of up to $8,000 (for one qualifying person) or $16,000 (for two qualifying people) in 2021 can be claimed regardless of your income, though the amount phases out at higher incomes. The American Opportunity Credit provides up to $2,500 per student toward the first four years of qualified undergraduate expenses. There are even tax credits available for energy-saving home improvements like solar panels. In 2021, you can receive a tax credit for 26% of the cost of these home improvements. And there’s a tax credit of $7,500 in 2021 for the purchase of an electric vehicle.
- Max out your IRA and/or HSA. Making contributions to a traditional IRA and Health Savings Account (HSA) can reduce your taxable income and thus increase the size of your tax refund. The good news is that you have until your tax-filing deadline next spring to open and contribute to an IRA or HSA and still impact your tax refund. For tax year 2021, you can contribute up to $6,000 to an IRA, or $7,000 if you’re 50 years of age or over. And you can contribute up to $3,600 to an HSA ($4,600 if you’re 55 or over), or $7,200 per family ($8,200 if you’re 55 or over). To open an HSA, you must also be enrolled in a high-deductible health plan with a minimum deductible of $1,400 (per individual) or $2,800 (per family).
- Time year-end financial transactions. The idea here is to make deductible payments that are due early next year before the end of this year to accelerate a future deduction into this year and increase your tax refund next spring. Your home mortgage is a good example: Make your January 2022 mortgage payment before December 31 of this year to accelerate the mortgage interest deduction for that month (if you qualify for it) into 2021. Other examples include charitable gifts, medical expenses and home office supplies if you’re self-employed.
Be sure to speak with a tax advisor about the details of your situation and whether these strategies make sense for you.