Filing tax returns elicits mixed reactions among Americans. It is always a moment of excitement for those who understand how to maximize their tax return. They are always eager to file their taxes to enjoy accumulated tax benefits.
On the flip side, it is a moment of anxiety among those who do not know how to maximize their tax return. If you are here, chances are you want to know how to maximize on your return.
This article highlights strategies you can leverage to reduce your tax liability.
Maximizing Your Federal Tax Return
The Internal Revenue Service (IRS) has a way of making everyone feel like they owe money, but if you know what to look for and how to maximize your federal tax return, you can get the most out of filing your federal taxes.
The most effective way to maximize your tax return is by taking advantage of applicable federal tax credits and income tax deductions when filing your federal tax return.
You can leverage applicable federal tax credits and income tax deductions to reduce your tax liability. Federal tax credits and income tax deductions are available for:
Individuals and businesses can determine which federal tax credits and income tax deductions they qualify for by using the IRS's interactive tool found on their website.
Using federal tax credits
IRS provides tax credits to help individuals who:
• Are working or looking for work
• Have low-to-moderate income
• Are parenting
• Belong to disadvantaged groups such as the elderly, disabled, among others
Using the federal tax credits, you are eligible for a powerful way to lower your tax liability when filing your federal return. These credits reduce your tax liability and are sometimes paid as tax refunds if you have more credits than what you owe in taxes.
Tax credits that are only deducted from your tax liability but cannot be paid to you as tax refunds are known as nonrefundable tax credits. Tax credits that you can use to reduce your liability and receive as tax refunds are known as refundable tax credits.
Common federal tax credits available for individuals include:
• Earned Income Tax Credit (EITC)
• Child and Dependent Care Tax Credit (CDCTC)
• American Opportunity Tax Credit (AOTC)
• Saver's Tax Credit (STC)
• Premium tax credit (PTC)
• Child Tax Credit (CTC)
• Adoption Tax Credit (ATC)
• Lifetime Learning Tax Credit (LLTC)
Earned Income Tax Credit (EITC)
According to IRS, most eligible Americans fail to claim this tax credit, yet it is one of the most lucrative credits in the American tax code. If you are a low-income taxpayer, EITC is designed for you. It helps you keep more of your income from wages, self-employment, or farming and is a good incentive for maximizing your tax return.
Child and Dependent Care Tax Credit (CDCTC)
You can maximize your tax return by claiming CDCTC if you are paying someone to take care of your child below the age of 13 while you attend school or work.
American Opportunity Tax Credit (AOTC)
If you are pursuing higher education, you can claim AOTC when filing your tax return. However, you can only use this tax credit for four years. It is paid as reimbursement for your tuition, books, and other education-related expenses.
Saver's Tax Credit (STC)
This is a special type of tax break given to individuals who are saving for retirement. Saving in a retirement account has several tax benefits, including the saver’s tax credit which you can use to reduce or even eliminate your tax bill.
The amount of saver’s tax credit subtracted from your tax bill depends on your adjusted gross income and filing status. If you want to raise your tax return, start, or increase your saving in a retirement account.
Premium Tax Credit (PTC)
This federal tax credit program is provided to eligible individuals and families to cover monthly insurance premiums. To get this credit, you must purchase a plan through the health insurance marketplace in your state and file a tax return with form 8962. The amount of the PTC you qualify for depends on your level of income relative to the federal poverty level.
You can use your premium tax credit in advance to lower your monthly premium. Suppose you use more than what you qualify for to cover your premiums, you will be required to pay the difference when you file your taxes. The good thing is that if you use less credit, you will be refunded the difference when you file tax return.
Child Tax Credit (CTC)
If you are parenting, it pays if you are aware that there is a credit tax facility to help you cover the cost of raising your children. If you are eligible, claim your CTC when filing your tax return. Following the signing of a $1.9 trillion American Rescue Plan by President Biden in March 2021, you can also apply for advance child tax credit payments.
Adoption Tax Credit (ATC)
If you adopted a child within the tax return filing year, you could maximize your tax return by claiming a tax refund. The amount covers court costs, adoption fee and other related expenses.
Lifetime Learning Tax Credit (LLTC)
If you are paying for higher education for yourself or a dependent, you can claim lifetime learning tax credit tax when filing your federal return. You can claim this tax credit indefinitely.
Find out if you are eligible for LLTC on the IRS website and maximize your tax return. Because it is a nonrefundable tax credit, you can only use it to pay the tax you owe. Find out which federal tax credits are available for you and use them to maximize your tax refund.
Using federal tax income deductions
Reducing your taxable income using federal income tax deductions available for individuals is a great way to maximize your tax return. These tax deductions help to reduce your income tax by allowing you to subtract certain expenses from your total income.
The most important aspect of income tax deductions that will help you maximize your tax savings is knowing your filing status. Your tax bracket, which determines the amount you pay in taxes, is dependent on your filing status.
In America, your filing status is closely tied to the following, among other factors:
• Your marital status
• Your occupation
• The number of children you have
The IRS allows you to choose any of these two income tax deductions depending on your filing status:
• Standard Deduction: This is a fixed dollar portion of your income that is not subject to tax and varies with your filing status. For example, the standard deduction for single or married taxpayers filing separately is lower than for couples filing jointly.
• Itemized Deduction: This option allows you to itemize your allowable deductions, which are then subtracted from gross income to reduce your taxable income. Allowable itemized deductions are subject to limits and may include charitable gifts and mortgage interest.
It is important to be honest about your filing status to avoid a potential IRS inquiry, audit, or penalties.
Here are the most common income tax deductions you can use to lower your taxable income and save money while filing your federal tax return:
• Charitable donation tax deductions
• Student loan interest tax deductions
• Head of household tax deductions
• Mortgage interest tax deductions
Charitable donation tax deductions
You can make use of charitable donation deductions to reduce your taxable income. These deductions allow you to subtract donations you make to qualified nonprofit organizations from your income to determine your taxable income.
The rules for subtracting your charitable contributions from your income are flexible and accommodate non-monetary donations too. All you need is to deduct a reasonable value of the donated item from your income. If you are an individual involved in charity work, this income tax deduction can be a great way of reducing your tax liability.
Student loan interest tax deductions
If you are repaying your student loan, this income tax deduction allows you to subtract interests on your student loan from your taxable income. This only applies if you are not classified as a dependent as you repay student loan.
When filing your federal return, find out if you qualify and leverage this income tax deduction to maximize your tax return.
Head of household tax deductions
Filing your taxes under the head of household status can maximize your tax return. This filing status is, however, confusing to many taxpayers.
You can only file under this status if you meet the following requirements:
• You are unmarried (single, legally divorced, or have lived apart from your spouse for at least six months).
• You live with other qualifying family members that you have supported for more than six months. Qualifying members include brother, sister, grandparents, or a dependent child.
• You pay for more than half of the total household bills, including rent, mortgage, insurance, property taxes, and groceries.
Filing as head of household comes with unmatched tax benefits including:
• Favorable tax rates
• Higher standard deductions
Mortgage interest tax deductions
If you are a homeowner repaying mortgage debt, use this federal tax deduction facility to maximize your tax return. To claim your mortgage interest tax deduction, itemize the mortgage on your federal tax return.
Maximizing Your Tax Returns In South Dakota
Every state has its own set of tax laws. South Dakota has limited individual and business tax obligations at the state level.
For instance, individuals and businesses in South Dakota benefit from:
• No corporate income tax
• No personal income tax
• No personal property tax
• No business inventory tax
• No inheritance or estate tax
Nonetheless, if you have domicile in South Dakota, you can still maximize your tax return by using the available federal tax credits and income tax deductions when filing your federal return.
For investors and businesses operating in South Dakota, here are the federal and state tax incentives to maximize your tax return:
• Work Opportunity Tax Credit (WOTC)
• Research and Development (R&D) tax credit
• Partners in education tax credit program
• Housing tax credits
Work Opportunity Tax Credit (WOTC)
Certain groups of Americans experience high rates of unemployment due to a range of employment barriers. To encourage employers to hire individuals in these disadvantaged groups, the federal government offers them work opportunity tax credit.
If you are an investor in South Dakota, you can hire employees from these underprivileged groups and use WOTC to maximize your returns.
Research and Development (R&D) tax credit
The R&D tax credit is one of the most valuable tax credits available for companies in the US. It is also known as the research and experimentation (R&E) tax credit and is offered to companies for undertaking transformational research activities.
Even though South Dakota does not offer R&D tax credit at the state level, companies engaged in qualifying research can benefit from billions of dollars of the R&D tax credit provided by the federal government annually.
If you have a company looking to make the most out of tax returns, you may consider transformational R&D activities. Companies can consult R&D tax credit experts to find out if they qualify and use online calculators to estimate their cash benefits.
Benefits of R&D tax credit include:
• Avails extra cash for your company to hire more employees
• Allows your company to offset payroll tax, especially if it is a startup
• Reduces your company federal and state income liability
• Increases company earnings per share
• Reduces your company’s effective tax rate
• Encourages R&D in the country
Partners in education tax credit program
This is a tax credit scholarship program in South Dakota that benefits insurance companies who give charitable donations to nonprofit Scholarship Granting Organizations (SGOs) providing scholarships to private students.
Housing tax credits
This is a federal housing tax program designed as an incentive for investors involved in construction and rehabilitation of housing for low-income households. The investor’s return includes annual income tax credit and other benefits generated by housing projects.
Other Methods For Maximizing Your Tax Return
Other than the above standard tax credit and income tax deduction facilities, there are alternative ways to maximize your return. Do the following:
• Use free tax software
• Hire a tax professional
Use free tax software
You can maximize your tax return by avoiding expensive tax filing software. This is a viable option if you are neither self-employed nor own rental property that would require you to make complicated calculations. Go for free editions and save money when filing your tax return.
Hire a tax professional
It pays to hire a personal finance expert to maximize your deductions so that you can end up with the lowest taxable income possible. If the tax professional you hire can identify credits and incentives that reduce your tax liabilities and taxable income, you can be sure to maximize your tax return.
Save Money By Legally Paying Less
We all have financial goals that we want to realize in the most sustainable ways. Saving money by legally paying less in taxes is one way of ensuring you always have more money to cover your family needs and investment. If you are looking to make significant savings in taxes, find out which of the tax incentives highlighted in this article are available for you.