This article was originally published on Investopedia.com.
One of the primary concerns on taxpayers’ minds during the tax season is how to get the most money back or pay the least amount of income tax when they file their tax returns. Unfortunately, many people tend to do little or no research on this topic, which often causes them to pay more income tax than they really owe. To help you avoid making such a mistake, this article will touch on some of the ways you get the most out of your tax return.
Claim All Deductions
Deductions, in a nutshell, are simply qualified expenses that reduce your taxable income. Most taxpayers tend to focus on the common and well know deductions, but there are several uncommon deductions you may qualify for. Examples include:
- Fees and dues to professional societies: You might have paid these fees to maintain your membership for professional purposes, such as maintaining a professional certification, maintaining your membership in a civic or public service organization or your membership in a business league.
- Job search expenses: You can deduct expenses related to job-searches – even if you did not get a job – as long as the job you were looking for is one in your present occupation.
- Travel expenses: If you had to travel away from home on a temporary assignment for work, you might be able to deduct related travel expenses.
- Charitable donations: If you made donations to charitable organizations such as the Salvation Army, the value of the items donated is deductible. Be sure to keep receipts for your donated items as the IRS requires that you have written confirmation for all charitable donations. But 2014 is the last year in which you can take a distribution from your traditional IRA and exclude it from taxation if you donate it directly to charity.
These are just a few of a long list of items for which taxpayers may claim a deduction if they are eligible. You may need to meet special requirements for some deductions, so be sure to check and make sure you are eligible before claiming any of these items on your tax return.
Credits are much more effective than deductions at reducing your tax bill as they are netted directly against the amount of income tax that you owe instead of merely reducing the amount of income upon which you owe tax. Available credits include the following:
- The Earned Income Tax Credit: This is for individuals who earn less than $9,078 from wages, self-employment or farming.
- The Child and Dependent Care Credit: This is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, while you work or look for work.
- The Child Tax Credit and the Additional Child Tax Credit: These are available to you if you if have qualifying children, and can be claimed while you claim the Child and Dependent Care Credit.
- Education tax credits: These can help to offset the cost of education.
If you are eligible for these credits, they can substantially reduce or even eliminate the amount of tax that you owe and thus increase your refund. They can actually provide you with a refund in some cases even if you had no tax withholding from your income for the year.
Should You Itemize?
Something that every taxpayer should take into account is whether or not he or she should itemize deductions. Generally, you should itemize your deductions if it results in a lower taxable income than if you claim the standard deduction. However, there are certain cases in which you will have no choice. For example, if you file a joint return with your spouse and you itemize your deductions, your spouse must do so as well. Itemizing your deductions is recommended if you:
- Incurred substantial unreimbursed medical and dental expenses.
- Paid interest or taxes on your home or other personal property.
- Incurred substantial unreimbursed employee business expenses.
- Had large unreimbursed casualty or theft losses.
- Donated large contributions of cash or tangible goods to charity.
In 2014, there is an adjusted gross income (AGI) threshold phaseout schedule for higher income filers who itemize their deductions. Following the instructions for filing your tax return can help you to determine these limits.
The Bottom Line
There are special rules that apply to claiming deductions and credits on your tax return. The IRS provides a wealth of information on its website, including complete instructions for filing your tax return with all the supporting schedules. And if preparing your return becomes too complicated, don’t hesitate to seek professional help. This may seem expensive, but it will be money well spent if that professional gets you a larger refund or prevents your return from being selected for auditing by the IRS.