Don’t let tax credits fall through the cracks
How can you get a bigger refund when filing your taxes? These tips can help:
Even if you’re dreading the process of filing your taxes this year, taking the time to know what you’re doing can equal a bigger refund check. Everything from plugging in your electric car to adopting a child can be considered for deductions, so don’t miss out on refunds this year.
The IRS offers several federal tax credit options designed to lessen the burden of taxpayers. This is especially true for low- and middle-income households, which often retain a higher percentage of their annual salaries for basic living expenses than high-income households.
Earn tax reductions with a retirement plan
Some of the best tax deductions tend to be linked to retirement plans. With these deductions, you save money on annual taxes and invest in your future.
The Saver’s Tax Credit‡ (previously known as the Retirement Savings Contributions Credit) is for those making eligible contributions to a 401(k), IRA, or other workplace retirement plans such as a 403(b), 457, or Thrift Savings Plan. If you’re contributing and are in a lower-income bracket, you can receive a tax credit up to $1,000 when filing alone and up to $2,000 if filing jointly. This credit is on top of the tax advantages already associated with retirement plans, which might include pre-tax contributions, tax-deferred growth, or tax-free withdrawals in retirement.
Tax credits for small business owners
The IRS also offers potential tax credits for small business owners. One of the biggest deductions is through a home office credit.
More than 50 percent of U.S. small businesses operate at an owner’s home, according to the Small Business Administration‡ (SBA). Unfortunately, many fear taking advantage of this tax credit will red flag an audit from the IRS. The good news is, that fear is usually unfounded.
To be eligible for a home office tax deduction, the IRS requires a portion of a residential property to be considered a legitimate home office. The home must be a primary workplace. If there is an additional office used, you cannot file a home office deduction. An exception can sometimes be made for those who work all day at an office part of the week and all day at home the rest of the week.
To figure out a home office credit, the SBA recommends calculating deductions by comparing the size of the home office versus the rest of the home. However, a business owner can also deduct expenses for a separate freestanding structure, which means a business owner can use a studio to conduct work, or a garage or barn for storage. But those freestanding structures should be exclusively for business.
Tax refunds as a way to save
Remember that getting a large refund may not always be in your best interest. It could be a sign that you’re having too much money withheld from your wages. If you have trouble saving on a regular basis, however, forced savings through tax withholdings is better than not saving at all. Just try to set aside all or a portion of your refund for the future. Some great ways to use your refund include paying down high-interest debt, building an emergency fund and investing for retirement.
Take a look at the IRS website for a comprehensive list of deductions‡, and ask a trusted tax accountant for advice on which ones apply to your situation so you can take full advantage of your options.
*This post is not meant to replace the advice of a tax professional.
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Mr. Chen is a Vice President and Portfolio Manager for UMB Private Wealth Management. He is responsible for all aspects of portfolio construction, including asset allocation, security selection and mutual fund analysis for high-net-worth clients. He joined UMB in 2013 and has 10 years of experience in the financial services industry. Mr. Chen earned a Bachelor of Science in Business with an emphasis in Financial Management from Kansas State University and Master of Science in Business with a Finance Concentration from the University of Kansas. He serves on the board of directors for the Financial Planning Association of Greater Kansas City and the Kansas City CFA Society. He is a Certified Financial Planner® and is a CFA charterholder.