When the holidays wind down, the real work begins — getting ready for tax season. April 15 will arrive before you know it, and you may already be wondering how to maximize your tax refund. Steps you take now, before the April 15 filing deadline, could help ensure you’re ready to file your tax return and get the most money back when the time comes.
Here are steps you can take right now that could help maximize your tax refund.
After the first of the year, tax documents will soon start landing in your mailbox or notifications may show up in your email. As your W-2s, interest statements, giving summaries, and other documents arrive, place them in a file folder so they can be easily found when you are finally ready to fill out tax forms. Make a list of all the papers you expect to receive, and check them off as you get them. Remember, you should have everything in hand no later than January 31, so if something’s missing, call the document issuer to find out why you haven’t yet received it.
Contribute to your retirement savings
Retirement accounts can also benefit you now, long before you retire, by reducing your taxable income. Before December 31, contribute the maximum amount allowed for the year to your tax-deferred retirement accounts. Those contributions come right off the top of your taxable income — that means not only do you avoid paying tax on that income now, but you’ll also pay a lower rate when you do. Granted, it won't apply to the taxes you're filing now, but it will benefit you in future years.
Donate to charity
Giving to charity is not only a good thing to do, it can be good for your taxes, too. Charitable donations may be tax-deductible, provided they meet IRS guidelines for making donations. Check out what the IRS has to say about making charitable donations during the previous tax year and see if giving to charity could help reduce your tax burden.
Use up flexible spending account funds
Employer-administered flexible spending accounts (FSA) often have a use-it-or-lose-it policy attached. The money you put into the accounts throughout the year comes directly out of your paycheck before you pay taxes on that income. You can use the money for designated expenses like healthcare or childcare (depending on the type of account). Unless your employer has a carry-over policy, you’ll want to exhaust the account now. Otherwise, you lose those pre-tax dollars and the tax benefit.
Prepay property taxes
It’s not uncommon for counties to send property tax bills just twice a year — in February and November. Prepay your spring property tax bill by December 31 of the preceding tax year and you could be able to claim it as a deduction on this year's tax return.
Adjust your withholdings for next year
According to the Internal Revenue Service, almost 75% of Americans received a tax refund in 2020. What that really amounts to is giving the federal government an interest-free loan throughout the year. Why not keep the money in your own pocket by adjusting your deductions to reduce the amount of income tax withheld from your paycheck? Your refund next year will be less, but you'll have more in your pocket right away each month instead of having to wait to get back the money you "loaned" Uncle Sam.
You also may be able to maximize your tax refund by itemizing expenses, which can get complicated, so consult a tax specialist or use one of the many tax software programs available that can walk you through the process. There's no avoiding tax day, but by being proactive, you can ensure you make the most of your refund next year.