It’s that time a year — when millions of Americans need to prepare their tax returns. It’s always drudgery. There are a few tax tips, however, that can cut down on the misery and increase your refund.
And yes, many people wait until the last minute (note that the deadline for 2018 is April 17th, which falls on a Tuesday). But this can be a mistake. By being more proactive, you have a better chance of boosting your tax refund, which could mean getting an extra few thousand bucks.
So what are the tax tips to consider? Well, let’s take a look at four:
Tax Tips #1: Run The Scenarios For Your Filing Status
One example is your marital status. Granted, for many people, the best approach is to use ‘married filing jointly’. But depending on the circumstances, you may instead want to file the return separately.
This could be the case when you have substantial medical bills. One spouse can take all these on the return. You deduct qualified medical bills that exceed 7.5% of your adjusted gross income (AGI).Then, since the income will likely be lower, there is the possibility of getting a higher deduction.
Here’s an example: Suppose you and your spouse have combined income of $100,000 and the medical bills come to $6,500. If you filed a joint return, you would not be able to take any of the medical deductions, since 7.5% of your AGI threshold is $7,500. However, if you file separately, your income might only be $40,000. This means your AGI threshold is $3000, and you can deduct $3,500, which is $6,500 minus the AGI threshold.
Another scenario where you might want to rethink your marital status is when you are single. Instead, you can opt to file as head of household, which can provide a higher deduction. To be eligible for this, you must have one or more children who live with you for more than six months and you have provided more than 50% of the expenses of the household. You may also be able to qualify for this status if you care for a parent (your parent does not have to live with you as long as you provide more than half the support).
Tax Tips #2: IRA Contributions
You can deduct up to $5,500 for an IRA contribution. If you are 50 years or older, the amount increases to $6,500.
There are some restrictions. The deduction may be reduced or eliminated if you are eligible for a employer-sponsored retirement plan or if your income is at certain levels.
But for the most part, an IRA is a pretty good deal. Interestingly enough, you have until April 18th to make a contribution.
So what about the recent market volatility? In the case of IRAs, short-term dips are not a problem as IRAs are focused on the long term. In other words, you should have more than enough time to ride out the volatility and build your nest egg.
Tax Tips #3: Casualty and Theft Losses
If you have sustained damage to your property or have been a victim of a theft, you may be able to get a tax deduction. Keep in mind that a casualty loss must be sudden and unusual, such as an auto accident, storm, fire, earthquake or hurricane. Progressive deterioration — say from a terminate infestation — does not qualify.
In order to take the deduction, the damage must exceed 10% of your AGI, minus $100 for each loss (admittedly, the $100 limit does seem kind of puzzling!).
Let’s take a look at an example: Suppose your AGI is $50,000 and you have a casualty loss of $7,000, which was from damage to our home from a major storm. In this situation, you can deduct $1,900. This is $6,900 ($7,000 loss minus $100) subtracted from the AGI threshold of $5,000 (10% of the $50,000).
You will then report this on forms 4684 and Schedule A.
Tax Tips #4: Hire A Tax Professional
There are plenty of deductions and credits that can increase your refunds. But of course, the rules can get complicated — so this is why hiring a tax professional can be a smart move.
Make sure that he or she is qualified, however. Generally, you should hire either a CPA or an Enrolled Agent. They have to take onerous exams as well as keep up with continuing education courses.
OK then, where to look for a tax professional? Well, a good place is the National Association of Enrolled Agents’ directory.
Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preperation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.