13 Things A Tax Expert Says You Can Do Right Now To Get A Bigger Refund Next Year
I don't know what it is about taxes, but every year it feels absolutely shocking that I once again have to file. On some level, I know it's going to happen, and yet I never really feel prepared for it.
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But as I'm becoming more financially aware and working to improve my money management habits, I've realized that taking a more proactive approach to tax season can really pay off.
And while it's too late to do much about our 2021 taxes now, this can be a great time to think about and plan for the 2022 tax year.
To find out what people can do today to get ready for next year's taxes and get a bigger refund, I talked with Jody Padar. She's known as The Radical CPA and she's currently the Head of Tax Strategy and Evangelism at April, a fintech startup that aims to make filing your taxes easier by providing tax-planning services year round.
1.First of all, getting a bigger refund isn't always better, so think about what makes the most sense for your money management style before you make any changes.
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Right off the bat, Jody blew my mind a tiny bit by saying, "Actually, a tax refund is bad in a way, because basically you've given your money to the government for the whole year."
"For most working Americans, the government is not giving you money. It's your money. And if you want to be the most astute financial person, you would want to think about the impact that has on your broader bigger financial life," she explains. According to Jody, if you're someone who has a tough time saving money or who relies on a refund as a kind of annual bonus, then it might make sense for you to withhold a little more to get a bigger refund.
However, if you want more money in your paycheck or are focused on growing wealth, then it may be better for you to strive for a lower refund. That way, you get your money as you earn it, and you can spend it, save it, or invest it as you please.
2.Taking advantage of tax credits is the most powerful way to reduce the amount that you owe, and some credits can beef up your refund too.
There are two main ways to cut down on how much tax you pay: credits and deductions. And Jody says that credits make the biggest impact. "Basically, what happens is we calculate taxes first, and then the government would gives you potentially a credit, and that's a dollar for dollar reduction of the taxes you owe." This means that if your state, for example, offers a renter's credit, your taxes get lowered by the exact dollar amount of the credit.
Jody also explains that some credits, called refundable credits, can even be added to your refund. So for example, let's say you owe $1000 in taxes, but you take advantage of a refundable credit for $2000. In this case, you can get $1000 back in your refund.
3.Deductions are another way to reduce the amount you owe, but they aren't as impactful as credits.
Unlike credits, which directly effect the amount of taxes you owe, deductions are tied to your taxable income. "A deduction is basically a subtraction off your income before your taxes are calculated," Jody says. "So let's say you make a charitable contribution. That's a deduction this year even if you don't itemize; you can give up to $300 to charity and get a deduction for it. So that means if you made $50,000 and you gave $300 away, your taxes are going to be calculated on $49,700."
4.If you have a 401(k) through your employer, putting money in reduces your taxable income. Less taxable income = paying less in taxes.
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Contributing to your 401(k) has so many benefits. From getting your employer match to creating a nest egg for your future, it's a great way to start investing. And your contributions count as a tax deduction. So if you put in $10,000 in a year, for example, you'll cut your taxable income down by that amount.
Worried that contributing to your 401(k) might make your paycheck too small? I've definitely been there, but Jody says you might not see your checks shrink as much as you think because your taxable income will be that much lower. "Let's say you contribute $200. There may actually only be, like, $100 difference in your check because the tax impact actually changes your withholding."
You can even use a paycheck calculator to see for yourself how changing your contribution may affect your pay.
5.If you get a W-2 from your job, you can also adjust your withholding so more money gets taken out of your paycheck for a bigger refund.
Jody says W-2 employees should, "think about your withholding." If you owed taxes this year, then you can have more money withheld from your checks so you can get a refund next year. To check on or change your withholding, get in touch with your HR or people team and ask about your W4 — this should be one of the forms you filled out in the first couple days of your employment.
"But if you've got a huge refund and you want less taxes taken out, you want more in your weekly check, then you're going to change your withholding so that they don't take so much out. That way you get less back at the end of the year but you get more in your paycheck," Jody explains.
6.If you are self-employed, deductions are a huge way to reduce your taxable income. And being organized throughout the year will save you a ton of time come tax season.
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If you're a freelancer or self-employed and you have to file quarterly taxes, Jody says that deducting your ordinary and necessary business expenses is a great way to cut your tax bill down. So if you're a writer, for example, these might include any subscriptions you need for work, your internet service, and any new equipment you bought, like a work-only laptop. Or let's say you drive for a rideshare service. You could deduct things like gas for the miles driven while working, amenities like bottled water, and so on. Not sure which expenses count?
Jody says, "If you go to the IRS website, there's a ton of publications that tell you exactly what they are. You can actually go pull the audit guides to see what gets allowed and what doesn't get allowed in ordinary and necessary business expenses."
To make this process smoother when it comes time to file, she says, "The easiest way to do it is open yourself a bank account and only run business expenses through it, so at the end of the year you don't have to figure out what you spent."
Keeping separate accounts can also be really helpful if you happen to get audited (yikes!). Being able to easily point to all your business transactions is so much less stressful than combing through your personal accounts trying to figure out what the heck you did.
7.And she has another tip for self-employed folks (and people who don't have a 401(k) through their employers): set up an independent retirement arrangement and contribute to it to lower your taxable income.
If you've read a few finance posts here, you've probably seen me sing the praises of my IRA. I opened mine through Acorns a few years ago when I was freelancing, and I only wish I'd done it sooner. You can also open an IRA with a brokerage or through your bank. If you want to lower your tax burden, opt for a Traditional IRA, which has a yearly contribution limit of $6000 if you're under 50.
Self-employed and looking to save more than that for retirement? Jody says, "There's something called a solo 401(k), and that actually allows you to deduct significantly more than $6000." This year, for folks under 50, you can contribute up to $61,000 to a solo 401(k), which is truly a LOT.
8.If you have W-2 job and freelance on the side, you can have more money withheld from your checks to cover your freelance taxes.
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"Let's make it a little bit more complex," Jody says. "Say you have a side gig, so you get a W-2, and you also do some freelancing on the side. What you might be able to do is have more withheld on your paycheck. If you have more taken out of your regular check, it actually helps because then you don't have to worry so much about those estimated payments and the timing of when the deposits are made."
9.But at a certain point in your side hustle or self-employed life, you might want to talk to a tax pro for more personalized guidance.
In case you haven't noticed, this tax stuff is complicated AF, and in a lot of situations it's better to have a pro helping you out. "I always say, if you get to the point where you're making $60,000 or more on the side or as self-employed, it might make sense to actually do some other sort of tax strategy — meaning, incorporate as an S-corp or do other things to save on taxes, but then that requires a little more education and probably a tax professional," Jody recommends.
10.If you work remotely and move states, update your employer on your location change immediately to keep the headaches to a minimum.
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If you move states mid-year, like I did in 2021, then you'll have to file two state tax returns, which is exactly as much fun as it sounds (not fun at all, lol). If you're planning a move, Jody recommends letting your employer know as soon as you've relocated so they can update your location and withhold tax accordingly. Otherwise, you'll have to calculate how much you earned in each location so that each state can take their cut of your taxes.
If you're more of a digital nomad, Jody suggests, "Pick a tax home, because if you're working from different states each month, do you really 12 different state tax returns?" That's gonna be a nope from me.
11.Remote workers might also need to plan for city and local taxes in addition to state tax.
With workers more and more spread out, it would be a true nightmare for many payroll departments to include and calculate everyone's local or city tax rates that might apply. If you noticed that you owed local tax this year, you can prep for it for next year by doing a little legwork to find out your area's tax rates. Then, "Calculate it based on your earnings and then you will know that you're gonna owe that $500 or whatever. And you can either pay it quarterly as an estimated payment or you can just know that you're gonna owe it at the end of the year," says Jody.
12.If you have kids, keep in mind that child tax credits will be going back to pre-pandemic levels so your return will look different next year.
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Jody says, "The big thing for couples with kids is: realize that the child tax credits are changing for next year and if they got a huge refund this year, or a different refund because they got pre-payments, that's changing next year. So really look at it because you don't want to be shocked next year."
She also recommends that parents take advantage of flexible spending accounts (FSAs) if they are available to you. "If you can take money out for childcare, absolutely do it through your FSA." Just like a 401(k), the money you put in an FSA gets deducted from your taxable income, and for 2022, you can contribute up to $5000. It may not cover all your childcare costs, or even come close to it, but every little bit adds up.
13.Finally, if you're paying off student loans, don't forget to take a deduction for the interest you've paid each year.
If your federal student loans have been paused this year, this deduction might not apply right now. But Jody recommends to anyone with private student loans, "If you're paying interest on student loans, go to whoever manages those student loans and get an interest statement. Download it, and take credit for the loan interest deduction that you've paid. It's a little bit — it doesn't make up for what people pay in tuition and interest. But if you get it, you should take credit for it."
Now I'm curious. Would you rather get a big, juicy refund check or have more cash in hand every payday? Share your take in the comments!
And for more posts about life and money, like these expert tips for fighting burnout at work or the money lessons millennials learned the hard way, check out the rest of our personal finance posts.
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