By Selena Garrison
Oh, tax season. The joyous time when we get to dig through old receipts and bank statements, trying to figure out what documents we need in an attempt to get back some of that money that we’ve handed over to Uncle Sam throughout the year. Whether you are hiring an accountant, using a free service like VITA (volunteer income tax assistance provided by the IRS), doing your taxes yourself by hand or using a program like TurboTax, a few tips can help you get the most money back (or pay the least out of pocket).
First let’s talk about your filing status. You have several options to choose from based on your marital status and dependents. If you are single (not married; divorced; or legally separated) with no dependents, you will file as Single. If you are married with or without dependents, you can choose Married Filing Jointly or Married Filing Separately. According to Brittany Beall, CPA with Crippen and Company, barring some pretty rare circumstances, it is more beneficial to file jointly, as joint filers receive greater tax benefits. However in some cases, like if one spouse has high medical bills or travel expenses, it might be worth filing separately. If you have special circumstances, running your taxes both ways can show you which option will be more beneficial. The Head of Household status applies if you are not married but have paid more than half the cost of maintaining a home for yourself and at least one dependent. Qualifying Widow(er) is a filing status that allows you to retain the benefits of the Married Filing Jointly status for two years after the year of your spouse’s death. You must have a dependent child to qualify for this status.
The next step is to document your income. Below is a list of the most typical income documentation.
- W-2 forms from your employer
- 1099-MISC forms if you are self-employed
- 1099-INT forms for interest earned or 1099-DIV for dividends received
- Other documents for income not reported on any of these forms
Next comes expense documentation. Many people take the standard deduction, but if your expenses are more than the standard deduction, you may benefit from itemizing some of the following deductions.
- Real estate taxes and mortgage interest
- Sales tax
- Medical expenses
- Gifts to charities and churches
The standard deduction for 2016 is $6,300 for single filers, $12,600 for those married filing jointly and $9,300 for heads of household. Brenda Ford, partner at Crippen and Company, said that there is an additional standard deduction for those 65 years and older — $1,250 for each taxpayer when filing a joint tax return or married filing separate and $1,550 for each taxpayer when filing as single or as head of household
When it comes to charitable donations, Brittany Beall suggested keeping a spreadsheet to track where the donation was made, what the donation was for and the amount of money or types of items donated. “Many people do not realize that when you make a donation to somewhere like Goodwill, you can ask for a receipt for tax purposes. It is important to document exactly what you gave (for instance, four pairs of jeans, 10 shirts and five pairs of shoes) and assign a dollar amount to that donation. The more specific you can be, the better,” said Beall.
Regardless of whether you are able to itemize or simply take the standard deduction, there are additional “above the line” deductions for things like moving expenses related to a job change over 50 miles away and retirement contributions. Beall suggested maxing out your retirement contributions to your IRA each year in order to reduce your tax liability while saving for retirement. For 2016, the individual IRA contribution limits (for tax purposes) are $5,500 for individuals under 50 years of age and $6,500 for those over 50. If you have not yet maxed out your contributions for 2016, you have until the April 15 filing deadline to do so and still be able to apply it to your 2016 contributions.
While deductions reduce your “taxable income” (the amount of income you are taxed on), credits reduce your “tax liability” (the actual amount of taxes you owe). Of course, you will want to take advantage of all credits for which you qualify. Some of the most common credits include the Earned Income Tax Credit (for low-income to moderate income working individuals and families), the Child and Dependent Care Credit (if you pay for child care while you attend work or school), the American Opportunity and Lifetime Learning Credits (related to higher education expenses) and the Child Tax Credit (if you have a relative dependent child who lived with you for a certain percentage of time). All of these credits reduce your tax liability dollar-for-dollar, so you definitely don’t want to miss out on them if you qualify.
While tax season may not be the most enjoyable time of the year, following these tips can help you get the most bang for your buck and maybe even put a little extra money in your pocket.