Did you know that the average tax refund in 2021 was $2,873? Many taxpayers look forward to a refund come tax time. Optimizing your deductions, credits, and withholdings can help you get the refund you deserve. These strategies can maximize your tax refund, but they require some extra effort on your part.
If you're a California taxpayer expecting a tax refund this year, make sure you maximize your tax refund by following these top five tax return tips.
What Is a Tax Refund?
First, an overview on tax refunds. A tax refund is simply a refund of overpaid taxes from the IRS. Ideally, you should try to break even so that you don't overpay or underpay taxes throughout the year. This is the purpose of withholding taxes from your paycheck—to ensure that you have paid the correct amount of taxes come tax season.
However, sometimes the government withholds more than necessary, and that's when you get a tax refund. In addition, various credits and deductions can impact the amount of taxes you owe, which is why many people end up getting a tax refund.
So, what do you do to make sure you get the biggest tax refund possible? Here are five strategies to maximize your tax refund in California:
1. Determine Whether Itemizing or Standard Deduction is Better for You
As a taxpayer, you have the option of taking the standard deduction or itemizing your deductions. The standard deduction is a set amount that reduces the amount of your taxable income, while itemizing allows you to deduct specific expenses that you've incurred throughout the year. Figure out which will result in a lower tax liability. There are advantages and disadvantages to each type and you should consult your tax professional to determine which would be most advantageous for you.
2. Claim Charitable Donations
If you made any charitable donations throughout the year, make sure to keep track of them so you can claim them on your taxes. This strategy is for those who itemize their deductions.
The IRS allows you to deduct donations made to qualifying organizations, and the amount you can deduct depends on the type of donation and the organization you donate to. Qualified charitable organizations are those with 501(c)(03) status.
For example, if you donated cash to a qualifying charity, you can deduct up to 60% of your adjusted gross income. Non-cash gifts, such as property or stocks, have different deduction limits.
3. Contribute to Your Tax-Advantaged Retirement Accounts and HSA
A great way to reduce the amount of taxes you owe is to contribute to a tax-advantaged retirement account, such as a traditional 401(k) or IRA. The money you contribute to these accounts is deducted from your taxable income, which could potentially lower your tax bill and boost your refund. The best part is, you can fund your IRA for the previous tax year up until the tax filing deadline.
For those who live outside of California, using a Health Savings Account (HSA) can also lower your taxable income and help improve your tax refund. An HSA is a savings account that can be used to pay for qualified medical expenses, and the money you contribute is not subject to taxes. Plus, the interest you earn on the account is tax-free, and the distributions are tax-free as long as they are used for medical expenses.
4. Take Advantage of Tax Credits and Deductions
There are many credits and deductions available that can make a big difference in your tax refund.
For instance, the IRS lets you deduct either your state and local sales taxes, or your state and local income tax (but not both). For high-income tax states, such as California, some taxpayers find it more beneficial to deduct state and local income taxes.
The Child and Dependent Care Expenses credit is a federal credit that allows you to claim a credit for certain child care expenses that you incur so you can work or look for work. You can claim a total of $8,000 in expenses for one qualifying child or $16,000 for two or more qualifying children.
California also has its own version of this credit. You can get a percentage of the Federal credit (depending on your adjusted gross income). If you paid someone to take care of your child (under 13) or a disabled dependent so that you could work, look into this tax credit.
There are also many others that may apply to your situation. Don't overlook credits and deductions when you're trying to maximize your tax refund.
5. Consult a Tax Professional
If your tax returns are complex or you want to make sure you're taking advantage of all the deductions and credits available to you, it's a good idea to consult a tax professional.
The vast majority of taxpayers take the standard deduction. But, if you have a lot of deductions to claim, such as charitable donations or medical expenses, you may benefit from itemizing your deductions. This adds time and complexity to your tax filing, but it could result in a lower tax liability and a bigger refund. Furthermore, tax rules change from year to year, and it can be hard to keep up with the latest changes.
A tax professional can help you not only get your taxes done correctly, but also maximize your refund.
Chatterton Can Contribute to Maximizing Your California Tax Refund
If you're looking to maximize your California tax refund, be sure to try out some of the strategies we've outlined in this post. Of course, you don’t have to go it alone—the tax professionals at Chatterton & Associates are here to help.
We have a team of tax professionals who can advise you about California tax laws. We can help you make sure you're taking advantage of every deduction and credit available to you, so you optimize your tax refund.
Don't leave money on the table—if you want to be sure you're getting the most out of your tax return, contact us today.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.