Skill Level Intermediate
- It's almost tax time. And before you send off your return make sure you check to see if you can take advantage of all the tax benefits offered to you. First of all, some lingo. Almost all tax systems have something called a standard deduction. This is a dollar amount that governments set for all tax filers and allows you to reduce your taxable income by that set amount. At the same time, some governments allow you to claim deductions for things like education expenses, mortgage interest, medical expenses, and childcare.
The key here is figuring out which amount is larger for you. If you add up all of your allowable deductions and it's larger than the standard deduction, then file an itemized tax return and take advantage of the larger itemized deduction. If your itemized deductions are lower than the standard deduction, then just claim the standard deduction. It'll save you a ton of work. And this is particularly relevant in the US, because starting in 2018, the standard deduction has gone up significantly. Above and beyond deductions, you need to look at tax credits.
These are dollar-for-dollar reductions in the amount of tax you owe. And the best part of credits is that some of them can lower your tax to less than zero, allowing you to get some of the credits back as a refund. But the first thing that you should know is that tax credits generally have earnings limits. So if you make too much money, the credits may not be available to you. But check anyway. You could be in for a pleasant surprise. In the US, make sure you look at the Earned Income Tax Credit.
It's a credit built to help lower-wage earners keep more of what they've earned. The best part of this credit is that it's a refundable credit, which means that if you don't owe tax, some of the credit will be given back to you as a refund. About a quarter of people who are eligible for the credit miss it. So make sure you check if you're eligible. Education credits are also common. In the US you'll find the American Opportunity Tax Credit and the Lifetime Learning Credit. These credits are available for qualifying education expenses.
You'll also find tax credits for contributions to retirement accounts. In the US this is called the Saver's Credit. Most countries allow a tax deduction, a tax credit, a tax deferral, or a combination of all three for contributions to a retirement account. Saving for retirement is hard, so governments try to make it easier for you. Make sure you take advantage of these. Finally, look at your final tax return. If you're getting a sizable tax refund, think about adjusting your withholding rate, which is the amount of tax your employer takes off your paycheck.
Essentially, if your tax refund is huge, you're actually loaning the government your money for the tax year, which you can then get back when you get your refund. Many people don't mind this. They use their refund as a forced savings plan, giving them a lump sum that they can use for bigger purchases. But maybe you could use the money during the year. So think about adjusting your withholding so you can have access to your money during the year. In the end, tax credits and deductions are a terrific way of cutting your tax bill or increasing the size of your refund.
Make sure you check to see if you qualify for them. A little bit of research can put a big chunk of money in your pocket.