1. Don’t Leave Money on the Table
If you forget to use all of your Flexible Spending Account (FSA) dollars or don’t make contributions to your individual retirement and 529 accounts, you could leave money on the table. You have until December 31 to use money in your FSA or contribute to a 529 account. Some states even allow deductions for 529 contributions.
Wondering how you can maximize your 2020 refund? If you’re ready to start working on maximizing your return for next year, consider how much you can contribute to retirement plans in 2020. You can contribute up to $19,500 to 401(k) plans.
Choosing to not file a return because your income for 2019 might also mean you’re leaving money on the table. Just because your income doesn’t require you to file doesn’t mean you’re not due a refund. And if you’re eligible for a refund, you have to file a return to get it. In 2018, the IRS reported it had $1.1 billion of unclaimed refunds from an estimated 1 million taxpayers who didn’t file in 2014 alone.
2. Claim All Available Deductions, Including Charitable Contributions
Dig into all deductions available to you. Some of the more common deductions include charitable donations, medical costs, prepaid interest on a mortgage and education expenses. Deductions are subtracted from your adjusted gross income, which lowers your actual taxable income.
Your taxable income is the amount you pay taxes on. The lower your taxable income, the less tax you pay and the higher refund you might receive.
If you’re charitably inclined and itemize your deductions, you can maximize your return by taking advantage of donations in all forms—cash and goods. That means you can claim the value of those clothes donated to a local church drive, for example.
Be sure to keep good records and receipts. Also, make sure that you’re only claiming deductions for organizations that have tax-exempt status with the IRS.
3. Use the Best Filing Status
What’s your best filing status? If you have a tax preparer, make sure you update them on any life changes you’ve had, such as getting married or divorced. Your relationship status on December 31 determines your filing status for the entire year and is the one you need to use when filing that year’s tax return. Options include:
- Head of household
- Married, filing jointly
- Married, filing separately
- Qualifying widower
Whether or not you can file head of household, which comes with some tax benefits, is one of the more confusing questions. To file as a head of household, you must:
- Be unmarried or considered unmarried on Dec. 31 of the relevant tax year
- Paid more than half of the costs associated with keeping and maintaining your home during the tax year
- Have a qualifying person, such as a child or other dependent, living with you for at least half the year
If you could technically file with two different statuses—like if you could file single and head of household—you might try calculating your taxes with both to find out which is in your best interest. This could mean checking to see if your refund changes whether you file as single or head of household or whether you file as married jointly or separately. Just don’t actually file your taxes until you make a decision, as you can only file once.
4. Report All Your Income
Some people fail to report all their income on their return. This oversight—intentional or not—can cost you. If you have unreported income and the IRS uncovers it, you’re looking at interest and penalties for unpaid taxes.
Sadly, you won’t get a free pass when you make an honest mistake. So spend a few extra minutes reviewing your return. Think through the year and your accounts to make sure you don’t forget any income sources. It’s often 1099 income that’s overlooked—things like contract work, interest income and dividends.
It can be helpful to keep a spreadsheet of all of your tax information—including sources of income, 1099s, charitable gifts and IRA and 529 contributions. Update it each year to help avoid missing things during tax prep. You’re less likely to forget about a 1099 if it’s listed in your prior year’s tax information.
5. Meet the Deadlines
Your 2019 federal tax return must be electronically filed or postmarked by July 15, 2020. The only exception is if you file an extension, which must be filed or postmarked by that date. An extension buys you through mid-October to file your return without penalties. However, you will still owe interest for any tax that was owed by July 15 and not paid.
What Happens if You Don’t File Your Tax Return on Time?
The IRS charges a number of penalties, including one for failing to file in a timely manner. It equates to 5% of your unpaid taxes and is charged for each month your return is late up to five months. And if you file more than 60 days late, you can be hit with a minimum penalty amount if even if you don’t owe any taxes.
If you don’t pay your taxes on time, the IRS charges penalties and interest on it. The total amount you might end up owing depends on how much tax you owe and how long it’s outstanding.
6. Check Your Math
It sounds a little obvious, but year after year, math or number errors are among the most common mistakes. When you’re filling out your tax forms, go slowly and double-check your numbers and math. A lot of mathematical errors can be avoided if you’re using tax software that does the calculating for you. If you find the entire process daunting, consider working with a tax preparer or accountant to help reduce these types of errors.
7. Check Your Bank Account Details
If you plan to use direct deposit to receive your refund, double check the bank account information you provide. If you enter the wrong account information, you won’t receive your refund as you planned. And getting things straightened out can be a pain.
If You Have to Refile a Tax Return
If you find you made a mistake after filing your tax return, make the necessary corrections as soon as possible. You need to file an amended return if you made mistakes regarding your filing status, dependents, income, deductions or credits. Form 1040X is used to file the corrected return, and it has to be done on paper rather than digitally. Amended returns must be filed within three years of the original filing date or two years from the point you paid any taxes owed for that tax year.