Tax Day has come and gone and many taxpayers are breathing a sigh of relief, ready to put it out of their minds until next year. Others may still be feeling dissatisfaction with their returns, either because they owed money or received a smaller refund amount than they had anticipated. If you are one of those disappointed taxpayers, feeling Uncle Sam owes you more than what you received, there are a few things you can do this year to potentially avoid the same disappointment in 2013.
The most obvious way for taxpayers to boost their refund amounts is to increase their income tax withholdings or to send larger estimated tax payments to the U.S. Treasury during the year. This may not be the best way for everyone, as it means bringing home a smaller paycheck throughout the year, but it does increase your prepaid taxes and, come tax season, can increase your refund amount. Keep in mind, however, that you don't want to over withhold or over prepay by too much, which would be akin to providing an interest free loan to Uncle Sam.
A better way to work towards a larger refund next year is by taking advantage of all the tax credits and deductions that you may be entitled to, but are often overlooked. On the IRS' website, you can find lists of "Overlooked Tax Benefits." Many tax firms offer "free" reviews of current and prior year tax returns to help identify missed tax benefits. Once you identify them, and provided you still qualify, continue to take advantage of them every year. You also have three years to amend your tax returns after they've been filed, so you may still be able to receive monies owed from prior years. If you find something, amending is relatively easy and you can do it today and get any monies back in a few short weeks.
Here are some other surefire ways to increase your refund, or lessen your tax liabilities on your next return:
- Keep track of all out-of-pocket medical expenses. Your doctor and prescription co-pays can add up. This is especially true if your deductible amounts to more than a few hundred dollars. If you are able to deduct your expenses, consider grouping your more expensive procedures in one year, such as braces or other major dental work; glasses, contact lenses or vision correction surgery; or hearing aids;
- Make and record charitable contributions. Don't forget to keep a log of all the miles you drive while doing volunteer work. The IRS allows 14 cents per mile for charitable work and this adds up. Keep the receipts for items you purchase and donate to various organizations such as food, baby supplies and household cleaning supplies. Always keep receipts for the cost of supplies or items later donated to a charitable organization;
- Log your travel expenses. Make sure you keep track of your mileage for work-related travel (commuting mileage is not allowed). The allowed mileage includes running local errands for your employer, like running to the post office or the local store for office supplies, and picking up visitors from the airport;
- Increase retirement contributions. Most taxpayers can put up to $5,000 into an IRA ($6,000 if age 50 or older) and reduce their income for the amount contributed. Not only are you reducing your taxes, but the earnings are not subject to income tax until you start withdrawing the money. Additionally, your 401(k) contributions and their earnings are exempt from taxes until you start withdrawing from the account when you reach retirement age. Ask a knowledgeable tax preparer if you are eligible for the Saver's Credit for up to $2,000 of your contribution to either an IRA or your pension plan at work; and,
- Get school credit. You may be eligible for the Lifetime Learning Credit for the tuition and fees. The mileage expenses, parking fees, books and other supplies may be deducted, as discussed earlier, if the education was job-related.
2012 is a big election year with many tax law changes being proposed that may show up in your next return. Although we do not know for sure what those changes will be, you can still prepare now by keeping a record of tax deductible expenses and receipts, and participating in tax deferred plans through work, such as retirement plans, health savings plans and dependent care benefit plans. All of these can help lower your taxes and increase your chances of a better outcome in 2013.