Since 2016 brings with it changes to tax laws and credits, it’s wise to keep up with the changes, but aside from that, it’s also important to know how you can best position yourself to get your full federal tax refund. You may have been reading in financial newspapers that the IRS announced its new inflation-adjusted income brackets for 2016. The IRS also increased the standard deduction for heads of household, personal exemptions, and the alternative minimum tax (AMT) exemption amount. Make sure you’re up to date on all tax changes that may affect your circumstances.
In the meantime, as you prepare for tax season, here are a few tips that are helpful to make sure that you receive a full federal tax refund that is owed to you. There are ways to reduce your tax liability at tax time. Don’t leave money on the table.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is going up in 2016. It’s important to stay up to date on revisions like this, because they may affect you and provide you a bigger refund. Approximately 20% of eligible Americans don’t claim their earned income tax credit. Credits actually work better than deductions as a refund booster. The EITC has eligibility guidelines that are based on the size of your family, which determines the exact income limits for claiming the credit. By following the guidelines, you can determine the maximum credit you can get. Nearly one out of every five taxpayers can benefit from the EITC. This year, the IRS has created EITC Awareness Day on January 29, 2016. Why? Many people do not take advantage of the credit. The 2016 Awareness Day marks the 10th anniversary. The IRS even provides taxpayers an election to have the IRS calculate the credit for you. A taxpayer is then only responsible to file and the IRS will calculate the EITC. Millions of taxpayers receive this huge tax break so don’t overlook this one.
Preparing for the tax year also means you can schedule payments to boost your deductions for the tax season. If you are a homeowner, paying your January mortgage payment before December 31st can increase your mortgage interest deduction. If you have health-related treatments and exams, scheduling them in the last quarter of the year can boost your medical expense deduction. Thirdly, if you pay your property taxes by the end of December, this can lead to a bigger refund, because it can make the difference between itemizing and taking the standard deduction. Finally, if you are self-employed, you can pay your fourth-quarter estimated taxes in December to increase your itemized potential.
Teacher’s School Supplies
If you’re a teacher, the IRS just made permanent the above-the-line-deduction for you to deduct up to $250 for school supplies purchased with your own money. Given inflation, the amount has been increased to $257. Since it is an above-the-line deduction, you do not need to itemize for the deduction.
Mortgages and Foreclosures
If you’ve renegotiated your mortgage or went through foreclosure, the exclusion for cancellation of indebtedness income on a principal residence has been extended through 2016. This allows a taxpayer with these circumstances to exclude up to $2 million from gross income. Attach a Form 982 “Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)” to report the amount qualifying for exclusion and any corresponding reduction of those tax elements. IRS Publication 4681 “Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals)” for information related to exceptions and exclusions.
Donations and Charitable Giving
Donations add up. They can also lead to substantial tax savings and a bigger refund. Review the restrictions. If the gift (charitable donation or noncash items) was received by a qualified organization by the end of December, and you have documentation, your donation could be tax-deductible. Some people do not realize that you can also deduct the fair market value of items that you donate, like clothing. Also, if you volunteered, any money you spent while volunteering counts too. Qualifying deductions include: parking, supplies, materials, transportation costs, and out-of-pocket expenses that are directly related to volunteering for a charitable organization. You can even include the mileage from a mileage log. Include your mileage log with your tax forms to show the details, including date of travel, charitable purpose and odometer readings, or MapQuest printouts in lieu of odometer readings. The IRS provides an “Exempt Organizations Select Check” online search tool to search for exempt organizations if you were not informed whether your donations are tax-deductible at the time you made your donation. Keep track of your donations and receipts, because it can save you money. You cannot deduct the value of the time you spent volunteering, however, if you volunteered your services. However, deduct those out-of-pocket expenses as mentioned.
Children’s College Expenses
If you have children in college, you might be eligible for tax relief for higher education expenses. The American Opportunity Tax Credit can offer you up to a $1,000 refund, even if you had no tax liability. The total credit is $2,500 and applies to the first four years of undergraduate higher education costs. The tax credit has been extended through 2017. If your modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return), you can be eligible for the full credit. Refer to Instructions for Form 8863 “Education Credits (American Opportunity and Lifetime Learning Credits).” If neither the American Opportunity Credit nor the Lifetime Learning Credit works for you, the government offers other favorable tax deductions, like deducting the interest paid on a school loan.
You might still have time to lower the amount of income you must report on your tax return. For instance, if you contribute money to a 401(k), that money is not included in your taxable income. That contribution needed to be made by the end of December. However, if you have self-employment income from a side job, you can contribute up to 20% of your net self-employment income to a Simplified Employee Pension (SEP) and you can make deposits anytime before the due date of your tax return. Anytime before April 18, 2016, you can also make a 2015 IRA contribution if you have an IRA. You can deduct your IRA contribution, depending on your income. Refer to Publication 560 for SEP IRAs, SIMPLE IRAs and 401(k) plans. Refer to Publication 590-A and 590-B for further discussions on contributions to traditional and Roth IRAs.
Stock and Investment Income and Losses
If you invested in stock, you may be able to gain some tax advantages. For example, what if you bought shares that became worthless or were a bad investment? You might be able to write off the holding on your tax return as a worthless stock. Report a valueless stock on Form 8949 “Sales and Other Dispositions of Capital Assets.” If your losses exceed your gains from investments, you can deduct up to $3,000 from your other taxable income. If your stock shares devalued significantly and you sold the shares by the end of the year, you have a loss that can be deducted. Schedule D allows an investor to claim capital losses from the sale of stock. If your loss from the sale was greater than the total of your long-term and short-term capital gains, then you can use up to the $3,000 in capital losses as a deduction against other income. Refer to Publication 550 “Investment Income and Expenses” for additional information on capital gains and losses.
Stay informed on changes to tax laws and credits, because it can be financially rewarding. There are many ways that you can find credits and deductions that will ultimately offer you the biggest refund given all the investments you made to your home, health, education, retirement, career, financial well-being and other aspects of your life.