5 Tax Tips to Help You Save Big on Your Tax Return
At this point in your life, your living arrangements, career, and number of dependents may all have changed … if so, the way you file your taxes should, too.
It’s not you, it’s taxes … they’re confusing. Which is probably why a 2018 survey by H&R Block found that only 19 percent of surveyed taxpayers updated the withholdings on their W-4 after a major tax reform bill was passed. And failing to do so put them at risk for a number of unplanned outcomes, including drastically higher refunds that could have meant more money in their pockets throughout the year, according to the survey.
Here’s where it really hits home. While taxes tend to be gender neutral — Uncle Sam will find you, whether you’re a man or a woman — anecdotally speaking, women tend to make more mistakes on their tax returns when they have suffered a traumatic event like a divorce or death of a spouse, said Paul T. Joseph, attorney and CPA at Joseph & Joseph Tax and Payroll in Williamston, MI. For example, they “don’t realize that if they are divorced on the last day of the year, they are single [for the entire tax year],” says Joseph. Ahhh, nuance.
Whether you’re going through a traumatic time in your life, have a lot of changes to file, or simply aren’t sure what the rules are anymore, here are some pitfalls to avoid:
Tax Tip #1: Learn Who Can Be a Dependent
When it comes to claiming dependents, there are a number of rules to keep in mind, but in general, children under 17 can be claimed for a child tax credit worth up to $2,000 per child, says Ben Watson, CPA, CFO of DollarSprout and founder of Fiscal Fluency … as long as they meet certain criteria, including:
• The child must be your own biological child, an adopted child, or a foster child placed in your care by an authorized agency.
• The child cannot have provided more than half of their own support during the year.
• The child must be a U.S. citizen, national, or resident alien.
• The child must have lived with you for more than half the year.
As far as college kids go, “you can still claim your child even if they’ve gone off to college or have graduated from college and are still living with you, if you’re providing a majority of the support,” says Joseph.
This tends to be a confusing area for divorced parents. “In general, the parent with whom the child lives for more than half of the year can claim them as a dependent for the child tax credit,” says Watson. “However, if both parents provide half of the child’s support, there are a series of tiebreaker rules — which are set by the IRS — if the terms are not decided in the divorce agreement.”
Only 19 percent of surveyed taxpayers updated the withholdings on their W-4 after a major tax reform bill was passed.
H&R Block, 2018
Tax Tip #2: Know Your Marital Status
As far as taxes are concerned, your marital status is determined by your legal situation as of December 31st of the year you are filing. In other words, “even if you lived apart from your spouse, or were separated for 365 days of the year, if you’re still legally married, you cannot file as ‘single,’” says Watson. On the other hand, “if you were single the entire year, but got married on New Year’s Eve, you can file as Married Filing Joint or Married Filing Separately, but cannot file as single for the year,” he adds.
The rules for widows are slightly different. For the year that a spouse died, the widow may still file Married Filing Joint. Then — as long as you have a qualifying dependent child — you may file as a Qualifying Widow for the next two years, says Watson. This essentially allows the widow to maintain the same benefits she would have received under a Married Filing Joint status, even though legally her status would be considered single.
Tax Tip #3: Report All School or Business Expenses
If you recently went back to school or started a business, you could be leaving money on the table if you don’t properly track and deduct certain expenses. For example, “if you’re going back to school, you may qualify for the American Opportunity Tax Credit or other types of deductions or credits against taxes for attending school,” says Joseph. Individuals who open their own businesses or change careers might be leaving deductions behind as well. Joseph suggests keeping copious records — including proof of expenditures and mileage logged when on the road for work — and consulting with an accountant to ensure you get the most out of your taxes if your career path has changed in any way.
Include any Health Savings Account to Boost Retirement Savings
A Health Savings Account (or HSA) is a tax-advantaged account that allows people to save for medical expenses that their health insurance doesn’t cover. People don’t often think of it as a way to help boost their retirement, but “if you’re trying to maximize retirement savings, it’s worth looking into an HSA to help fund future healthcare costs,” says Brandon Pfaff, a CPA and tax expert who serves on the advisory board for Wealthy Living Today. “Contributions to these accounts and withdrawals for qualified medical expenses are both tax-free.”
Tax Tip #5: Change to a 529 Plan
Saving for college is a marathon, not a sprint, and sometimes, over the course of the years you’ve been saving, your kid’s plans may have changed. Or perhaps you simply over-saved for the school they ended up attending (LUCKY YOU!). Either way, Pfaff recommends changing the beneficiary on any account that still has money in it after your child is out of school (or doesn’t go) to avoid getting taxed on the leftovers. “This way, the money can continue to grow tax-free,” he says. While the money will still need to be put toward educational expenses, “common beneficiaries can be yourself, grandchildren, and nieces and nephews,” he says.