Ways to Help Maximize Your Tax Return
Ways to Help Maximize Your Tax Return
A recent television ad for tax preparation software featured a poker game in which the tax accountant, dressed as a dealer, helped secure a large tax refund check. While the poker angle was a clever advertising gimmick, the tax preparation company actually mangled the true message. The ad seemed to suggest that, much like poker, filing your tax return is a gamble that can be quite financially rewarding if you're lucky.
The problem with comparing taxes to poker is this: in poker, your fortune depends entirely on the luck of the draw, whereas the amount you receive in your tax return has nothing to do with chance. In reality, preparing your tax return is a game of strategy—more like chess than poker. It's a game that's played continuously throughout the year, and not just in the first three months (known as the dreaded “tax season”). Here are some tips on how to optimize your refund for the 2012 tax year.
Make contributions into your retirement account such as a traditional or Roth IRA. An Individual Retirement Account, or IRA, is a bank or brokerage account that allows you to set aside money each year for retirement. It's often a win-win choice, one that your accountant—and your future self—will appreciate. The best part is that an IRA is deductible “above the line,” meaning you don't have to itemize your deductions in order to take advantage of the benefits. However, consult with your accountant first and let them help you decide how much you can contribute. Your accountant will need to consider other factors such as your income level and whether or not your employer covers you.
Convert your IRA to a Roth IRA. Generally, the goal is to defer taxes to future years, but with the impending increase in income tax rates, it may make better sense to convert your retirement account to a Roth IRA this year. There are no income limitations to Roth IRA conversions. Ask your accountant if converting from your traditional IRA to a Roth IRA will benefit you based on your personal tax situation.
Increase your itemized deductions by documenting your charitable donations. For example, if you and your family are moving, why not donate any furniture or clothes you won't keep? Make sure you ask for a receipt from the charitable organization you made the donation to. Holding on to that receipt ensures that you will see your charity rewarded. If you are looking to buy a new car this year, consider donating your old one. In order for your contributions to be deductible, make sure the organization receiving the donation is a qualified institution accepted by the IRS.
Keep track of your medical expenses. Glasses, fertility treatment, hospital services, lab fees and glucometers all count as medical expenses. You can even deduct the cost of parking and transportation to and from your doctor's office, or the cost of capital expenses for medically related home improvements. Be sure to keep a mileage log that details the miles driven for medical purposes.
Lower flexible spending account limits in 2013. Flexible spending account limits are the same in 2012 as the previous year at $5,000. However, new federal regulations set the new limit at $2,500 in 2013. If you've been putting away funds for an expensive medical procedure not covered by your insurance, it might be worth scheduling to have this procedure done before December 31, 2012.
Get a personalized tax plan. Schedule an appointment with your accountant and go over the strategies you can implement to save more in taxes. It's best to have a tax plan in writing so you can refer to it throughout the year. Having a written plan produces a higher probability that your goals will be achieved efficiently. More often than not, taxpayers who owed money on their returns didn't have a tax plan or strategy in place. Taxpayers with a written plan can help save money and get better refunds at the end of year.
Qualifying the sale of your home for tax exclusion. Did you know you can exclude all or part of the profit from the sale of your main home? It's true. This capital gains exclusion is up to $250,000 for individuals and $500,000 for married taxpayers filing a joint return. In addition, this isn't restricted to just once in a lifetime—the exclusion can be claimed each time you sell your main home but generally not more than once every two years. In order to qualify, you must meet the ownership and use tests as provided in the tax code. The ownership test requires that you must have owned the home for at least two years in the five-year period ending on the date of the sale and the use test requires that you must have lived in the home for at least two years during the five-year period that you have owned it. Before placing your home on the market, it might be wise to meet the above IRS requirements so you don't have to pay taxes on the full gains from the sale.
These are just a few of the many tax strategies you can use to your advantage. Remember, your return isn't a card game, and your refund isn't in chips. It's a reward for carefully planning your finances throughout the year. To keep you on track, plan ahead--and when in doubt--speak to a tax professional sooner rather than later.
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