6 Ways to Maximize Your Refund This Year
Whether you fear a large tax bill or want to maximize your refund, you may think it’s too late in the year to make a difference on this year’s tax return. I am here to say “INCORRECT!” In fact, there are several actions you can do in a relatively short amount of time and improve your tax situation. Here are a few of the tax breaks available to procrastinating planners.
1. Contribute to a Health Savings Account
If you participate in a certain type of health plan, you may be eligible to contribute the following amounts into a health savings account (HSA) in 2015:
- Up to $3,350 if you have self-only coverage
- $6,650 if you have family coverage ($4,350 and 7,650 respectively if age 55 or over)
This contribution can be made up until the due date for your return, so you can decide to make a contribution for 2015 as late as April 18, 2016.
If you have not reached this contribution limit for the year, it may be a good idea to contribute. Contributions are deductible even if you do not itemize your deductions. In addition, HSA funds can remain in the account and do not expire at the end of the year. So, placing money into the HSA may enable you to cover potential out-of-pocket expenses in the future. If an HSA distribution is used to pay medical expenses, the distribution is not taxed.
2. Bundle Medical Expenses
Medical expenses are deductible for certain people. However, this deduction is limited; it only applies when both of the following are true:
- You decide to itemize your deductions (instead of taking the standard deduction), and
- Total medical expenses paid exceed 10% of your adjusted gross income (7.5% if you are age 65 or older).
For many, these restrictions will prevent any medical expenses paid out-of-pocket during the year from being deducted on their return.
If you do qualify for this deduction, it’s ideal to bunch medical payments into a single year. Since the deduction applies when the expense was paid, if your medical provider allows it, you can arrange to pay medical expense from prior years or future years in the current year. This allows you to increase your total medical expenses for the year.
3. Make Charitable Contributions
This is another sometimes-overlooked deduction. Charitable contributions can both decrease your tax liability and allow you to give back to your favorite cause. Contributions can be made in cash or property to any qualified charitable organization, although special rules and restrictions may apply for non-cash contributions.
As with medical expenses, this deduction is only available for those who itemize. There is generally no restriction on the amount you may give to a qualified charity. However, if your income exceeds certain levels, the amount you can deduct may be phased out or eliminated. Contributions are deductible in the year they are made. So, by giving more to a qualified charitable organization before the end of the year, you could increase your tax deduction.
4. Maximize Your Retirement Plan Contributions
Retirement savings can also help reduce your tax bill. For individual taxpayers, the best way to accomplish immediate tax savings is by setting up a traditional individual retirement account (IRA).
Depending on your income, filing status, and retirement plan coverage through work, you may be able to deduct up to $5,500 in 2015 ($6,500 if age 50 or over). Like with HSAs, you do not need to itemize to deduct IRA contributions. Another bonus is that contributions can be made until the tax due date of the following year (April 18, 2016, in this case).
There are also less common ways a retirement plan can be a good last-minute tool to lower your tax. Making contributions to an IRA or employer-sponsored plan (like a 401(k) plan) may allow you to claim a credit for retirement savings. For small-business owners, setting up a retirement plan in connection with that business can reduce your net self-employment income and, by extension, your self-employment taxes. Assets held within these retirement plans will also grow tax-free over time.
If you are interested in opening an IRA before the end of the year, Bank of the Internet USA offers various options for Traditional and Roth IRAs. Learn more about Bank of the Internet services.
5. Make Education Savings Plan Contributions for State-Level Deductions
Contributing to an education plan like qualified tuition programs (QTPs, or 529 plans) and Coverdell Education Savings Accounts (ESAs) will not qualify you for a deduction on your federal return. However, many states will allow a deduction on the tax return for these contributions. Furthermore, in many cases there are no limits placed on how many such accounts may be set up.
6. Prepay Your Mortgage or Property Tax
Another pair of common itemized deductions, especially for homeowners, is for mortgage interest and real property tax payments. Often, it is possible to arrange your billing for these expenses so that interest and tax payments for the following year can be paid before the end of the current year. For example, you may be able to pay mortgage interest for January 2016 prior to December 2015, which would allow you to deduct the mortgage interest paid on your 2015 return.
By taking advantage of one – or more – of these tax strategies before the end of the year, you put yourself in a great position for tax time. If you need any additional help, you can always consult with one of our tax professionals, too.
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