The end of the year is a busy time: People have the holiday season to prepare for, the New Year, and of course, tax time to consider as well. Tax season helps some households recuperate some of the money they spent during the holidays, and that refund can also help consumers catch up on bills, pay down debts, and increase their savings account balances.
To reap the benefits that can come along with tax time, however, you have to make sure you’re entitled to a refund first, which is something you can start looking into right now. If you begin working towards minimizing your tax liability early on, you can potentially increase the money in your pocket come tax time.
Here are a few things you can do right now.
1. Use good timing
Timing payments and purchases can make a difference when you file your tax return, especially during the month of December. If you pay January’s mortgage payment during December, for instance, that could get you added interest for your mortgage interest deduction on your return. And, if you schedule your medical procedure in December instead of waiting until January, for instance, that could just be the extra amount you need for your medical expenses deduction.
If you were planning on incurring these expenses anyway, consider taking on some of these expenses during the 2014 tax year if they will benefit you at tax time.
2. Thoroughly analyze last year’s return and look for missed opportunities
Last year’s tax return can serve as an excellent resource when preparing for tax filing this year. Not only can you gather information — like your adjusted gross income (AGI) — for when you get ready to e-file, you can also use last year’s return to get an idea as to what credits you are eligible for and what type of refund you’re looking at. This will save you time when it’s time to file.
In 2013, the IRS issued around 45.86 million refunds totaling $135.025 billion. In 2014, it issued around 48.3 million refunds totaling around $146.92 billion. The average refund in 2014 was $3,034 — only $90 more than it was in 2013. Overall, many taxpayers maintain a similar situation from one year to the next. If nothing has changed in terms of your job, income, or lifestyle, your tax liability will remain around the same, unless of course, you find additional opportunities for tax savings.
Although there are software programs, tax professionals, and literature that help taxpayer’s find deductions and credits, people overlook tax benefits all the time. As of 2013, the U.S. tax code requires 73,954 pages of text to explain, rendering it nearly impossible for someone to grasp every line. Does anything stand out on last year’s tax return? If you notice any missed opportunities, make a note of them so that you can be sure to take advantage.
3. Make IRA contributions
Not only are you investing in your future when you open up an IRA, contributing to an IRA can increase your tax refund because the money you place into it may end up reducing your taxable income — the more you contribute, the less taxable income you may have to claim.
For the 2014 tax season, the contribution limits are $5,500 if you’re under age 50, and $6,500 if your age 50 or older. It’s not too late to take advantage of IRA tax benefits. “You can make 2014 IRA contributions until April 15, 2015,” according to the IRS.
4. Gather documentation and compare different filing scenarios
When filing time comes around, most taxpayers just want to get it over with and get their refunds. It takes time to gather every receipt, every figure, and every single piece of documentation you need to file your return. So, getting these items together in advance can help prevent you from missing any pieces of documentation that may result in a larger refund.
You can also use the information you have available right now — like your tax return from last year and your last pay stub — to compare different filing scenarios. How much of a refund will you get if you file as “married” compared to “married filing separately?”
5. Find inexpensive (or free) ways to file
Filing taxes the old-fashioned way meant visiting a professional or reading and filing out that booklet line-by-line. Paper filing was tedious, and it required a certain degree of understanding of the tax code. These days, taxpayers have several options when it comes to filing, ranging from paid or free software to a CPA or H&R Block.
Taxpayers with simple tax situations can sometimes benefit from free file, as they save money on filing fees that would otherwise be deducted from their returns (or come out of their pockets). “Free File provides free federal tax prep and e-file for taxpayers, either through brand-name software or online fillable forms,” says the IRS. It is available to those with incomes of under $58,000 and IRS Free file has saved users over $1.2 billion in fees.
Several companies, like FreeTaxUSA and TaxACT, offer free basic e-file services and for many of them, you can file for free even if you have a higher income. You generally have to pay a small fee — often under $20 — to file a state return (or a complex federal return), but the cost ends up being a fraction of what you’d pay if you went to a tax professional.
On the other hand, if you’re uncertain of which deductions and credits you qualify for, or you don’t feel completely confident completing your return using software, it’s better to consult a professional than to risk sending in an incorrect or incomplete return.