Want to know how to get a bigger tax return refund? Overlooked deductions are the first place to start, but the truth is they barely scratch the surface when it comes to finding every deduction you qualify for.
And some of the best-overlooked deduction opportunities are often the ones starring you right in the face. If none of these apply to our list, give us a call, and we will help provide a second perspective. We just need a second pair of experienced eyes to take a look.
Claiming Elderly Dependents and Their Medical Expenses
Claiming dependents seems like the most obvious way to increase your refund. Still, you would be surprised by the number of missed deductions from not properly documenting children or completely neglecting other members that qualify.
For example, most people don’t know that elderly dependents that don’t file taxes are non-verifiable. Since many parents and grandparents living entirely off social security are considered to have 0 gross income, there is no way to verify that the expenses you cover are more than half their income. So as long as they depend on you in some fashion and no one else claims them as a dependent, then you can claim them. This includes grandparents, cousins, siblings, aunts, uncles, and so on.
Claiming these dependents helps in two ways. First, it makes you eligible to receive a $500 tax credit (Other Dependent Credit). Secondly, it allows you to include expenses you made to cover your dependent’s medical costs in your total amount of medical cost deduction. Any medical costs that exceed 7.5% of your yearly adjusted gross income will be tax-deductible.
Your (or someone else’s) Mortgage Interest payments
If you just took out a loan for a house or related building, then potentially all or a portion of the interest payments made in the 2021 year are tax-deductible. The reason why only a portion could possibly be tax-deductible is that the IRS recently capped the total amount of deductible interest payments at loan balances of $750,000.00. So in other words, if your interest payments are for a loan balance of $800,000.00, then the tax deduction will be marginally lower than the total interest paid.
It is very common for a relative to take over another relative’s mortgage payment. Many don’t know that the interest payments made on behalf of someone else can be deducted as well. The same $750,000.00 cap applies, but there needs to be written bank statements noting that funds were used for a mortgage payment.
Remember that most mortgage interest tax deductions don’t cut more of your tax bill than the standard deduction. But, if you follow our list of overlooked deductions, it can certainly help get you well beyond that amount.
State Sales and Property Tax
Both sales and property tax can be used as itemized deductions. Unfortunately, new tax laws recently capped all state tax deductions at $10,000. But $10,000 can help most get very close to their standard deduction amount.
Big purchases like RVs, boats, and cars all have hefty sales taxes. So keeping these receipts is critical. This helps reduce your total tax liability in a single line item. The IRS understands that many big-ticket sales can help taxpayers push their itemized list of deductions well beyond the standard deduction. So, listing these items will undoubtedly capture their attention. Keeping your records organized and easily accessible will protect you in the case of an audit.
Claim losses from starting a business
One of the most overlooked deductions is the loss realized from starting a business. The pandemic gave people a lot of time to get creative. Some tried coffee shops outside their window, many TicTokers started selling homemade bread, and countless others bought domains for ideas that never panned out.
Many don’t realize that the IRS still counts losses under sole proprietorships in addition to LLCs and corporations. Keep in mind that if your sole proprietorship losses are reported two years in a row, though, then the IRS may deem that your business is a hobby and won’t let you deduct business expenses from your tax bill.
Calculating business loss is as simple as subtracting business expenses from business income. If that is a negative number, you can say that your business operated at a loss. Unlike classic itemized deductions, this deduction is used to calculate your adjusted gross income. The benefit is that if you experience a loss but didn’t have enough itemized deductions to surpass the standard deduction, you can claim this loss and take the standard deduction. Make sure to include a list of business expenses with your loss to calculate a lower AGI (adjusted gross income). Keep in mind that the IRS caps these losses at $262,000 for a single taxpayer or $524,000 for a joint tax return.
Individual Retirement Account (IRA) contributions
Choosing a traditional IRA (individual retirement account) over a Roth IRA has many pros and cons, but one perk of the traditional account is the income tax deferment. Basically, any income added to the account doesn’t get taxed until it is taken out. These contributions are capped at $6000 a year, so a worker in the 24% tax bracket who maxes out this account will reduce her federal income tax bill by about $1,440.
On the other hand, the Roth IRA contribution is not tax-deductible. Every contribution is taxed the year it is added, so any money taken at least 5 years later will be tax-free. Taxpayers benefit from this option more if they happen to be in a higher tax bracket at the moment of taking the money out. Both options, though, are taxed as income instead of capital gains. Since capital gains tax rates are significantly higher than income tax, Americans save a lot of money from either option.
Health Savings Account Contributions
If you are one of the many Americans opting for high deductible healthcare plans, then you have an opportunity to save the same money in your taxes. If you set up a health savings account, you will be able to include your contribution amount in your itemized tax deductions. Keep in mind that the maximum amount adjusts each year. In 2021, the limit for individual coverage was 36,000, and family coverage was $7,200. Anyone 55 and up can add an extra $1000.
Additional Strategies to Get a Bigger Tax Return Refund
There’s an endless list of additional strategies that can help you get a bigger tax return refund. For example, if you used your children to help start that new business, you can deduct their wages as business expenses. This would very likely offset your child’s income tax burden if the total amount was under the standard deduction.
But that’s not only how your children can help. Don’t forget that you can deduct up to $4000 of your child’s college expenses. And if you decide to buy a second home to be closer to your children, you can include the second mortgage interest payments in your deduction as well.
All deductions, big and small, add up. Many are surprised by how quickly they can get their itemized deductions above the standard deduction limit. But also, keep in mind that some of these deductions are used to lower your adjusted gross income, which means that even if your itemized deductions don’t surpass the standard amount, it is still important to include these AGI (adjusted gross income) deductions for a lower tax bill.
We understand that things get complicated quickly, so we can help navigate and alleviate the stress. We combined the simple, user-friendly experience of tax automation with personalized tax consultants. Get ahead of the curve by starting the process today by starting the process at IRBInc.com.