Take advantage of new tax relief and these often-missed tax deductions to get more money back in your pocket.
THIS IS THE TIME OF year many taxpayers are thinking about filing their taxes to get their tax refunds. Nearly 75% of taxpayers received a tax refund last year, and the average direct deposit tax refund was close to $3,000 last tax season, according to the IRS. However, some filers may not have had the tax outcome they were expecting last year or they may be wondering if there are any new tax benefits to help with impacts of 2020.
Whether you received the tax refund you deserved, think you could have gotten back more last year, or you were impacted by the events that took place in 2020, here are six tips to help you maximize your tax refund this year.
Take advantage of the tax benefits provided by coronavirus relief measures.
Don’t take the standard deduction if you can itemize.
Claim your friend or relative you’ve been supporting.
Take above-the-line deductions if eligible.
Don’t forget about refundable tax credits.
Contribute to your retirement to get multiple benefits.
Take Advantage of the Tax Benefits Provided by Coronavirus Relief Measures
The year 2020 was full of events that impacted just about everyone’s lives in one way or another. If you were affected by the events of 2020, there may be tax implications, and there may also be tax relief for you under one of the coronavirus relief packages passed in 2020. The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, and the Coronavirus Response and Relief Supplemental Appropriations Act provided a series of relief measures like expanded unemployment benefits and stimulus payments. Stimulus payments are not taxable under the relief packages, and if you did not receive the full stimulus payment, you may be able to claim more in the form of a recovery rebate credit when you file your taxes. The recovery rebate credit can increase your refund or lower what you have to pay.
If you received expanded unemployment benefits due to being laid off or furloughed, one thing to be aware of is that unemployment income is taxable; however, you may be eligible for income-based tax credits and deductions that you weren’t before like the saver’s credit or the child and dependent care credit. The CARES Act also provides a provision allowing taxpayers who claim the standard deduction to also take an above-the-line deduction for up to $300 in cash donations to charity.
If you are self-employed and you were sick, quarantined or taking care of a family member, you may be able to claim new tax credits called qualified sick and family leave credits under the Families First Coronavirus Response Act.
If you took a coronavirus-related withdrawal from your retirement account under the CARES Act, you may also be able to waive the 10% penalty for early withdrawal before age 59½. Your distributions will also be able to be included in your taxable income over three years instead of all included in your 2020 income.
Don’t Take the Standard Deduction If You Can Itemize
Under tax reform, more people may take the standard deduction instead of itemizing because the standard deduction nearly doubled ($12,400 for single filers and $24,800 for married taxpayers filing jointly) and some tax deductions were either eliminated or reduced. In fact, TurboTax estimated and IRS confirmed that about 90% of taxpayers now claim the standard deduction instead of itemizing their tax deductions, up from about 70% before the new tax law.
Although more taxpayers will claim the standard deduction as a result of the changes, and the standard deduction will help lower your taxes, you may find that you can still itemize your deductions to get a bigger tax refund if you take a little time to gather some of your receipts. If you are close to the standard deduction thresholds, don’t forget about some additional expenses that may push you over the standard deduction. These expenses include qualified charitable contributions, casualty and theft losses if they are a result of a federally declared disaster, gambling losses up to gambling winnings and points paid on a new mortgage or refinanced home loan.
Claim the Friend or Relative You’ve Been Supporting
If you have been supporting your friend, significant other or relative, you may be able to claim him or her as a dependent. There are some rules regarding who qualifies, but the deduction is legitimate if your non-relative has lived with you the entire year (relatives don’t need to live with you), doesn’t provide more than half of his or her own support and didn’t earn more than $4,300 in taxable income in 2020. Although you can no longer claim the dependent exemption under tax reform, you can claim the other dependent credit for non-child dependents worth up to $500.
Take Above-the-Line Deductions If Eligible
Above-the-line tax deductions allow you to reduce your taxable income without itemizing. Examples include if you are a teacher and paid for your students’ school supplies including personal protective equipment, went back to school to land that promotion, paid alimony in 2020 (if your divorce was final before 2019), pay self-employment tax, paid student loan interest, contribute to your IRA or had unreimbursed moving expenses if you are active-duty military. The reduction to your taxable income may also help you get a bigger advanced premium tax credit if you received assistance to help pay for insurance in the health insurance marketplace.
Don’t Forget About Refundable Tax Credits
A tax credit is a dollar-for-dollar reduction of the tax you owe, and a refundable tax credit will allow you to have a credit beyond your tax liability. The earned income tax credit is worth up to $6,660 for a family with three or more children. One out of five taxpayers who are eligible for the credit fails to claim it, according to the IRS. Some taxpayers miss this valuable credit because they are newly qualified due to changes in their income. Or they chose not to file their taxes if their income is below the IRS income-filing threshold ($12,400 if you’re single or $24,800 if you’re married filing jointly).
Contribute to Your Retirement to Get Multiple Benefits
You have until the filing deadline to make a 2020 contribution to your IRA and reap the benefits of a tax deduction of up to $6,000 ($7,000 if you are 50 or older). In addition to this deduction, you may qualify for the saver’s credit. This is the only time the IRS allows you to double-dip. The IRS gives you an additional credit of up to $1,000 ($2,000 for married filing jointly) if you contribute to your retirement.
