Every year, tax season kicks off in January and lasts until the April 15th filing deadline. While not every taxpayer will receive a refund, if you’re among the millions that do, you want to get the most out of your tax refund. There are also steps you can take to minimize your tax liability and increase your refund. In this article, we’ll explain what a tax refund is and how you can make the most of yours. These are intended to be general tips; consult a tax professional for personalized advice.
What is a Tax Refund?
If you are a full- or part-time employee (as opposed to an independent contractor), your employer withholds state and federal income taxes from each paycheck you receive. The withholding amount is based on the information you provided on your W-4 form.
When you file your tax return, the IRS determines how much you owe the federal government in income taxes. Your state return is processed by the state. However, if you had more withheld during the year than you owe, you will receive a refund. If you underwithheld, you will owe taxes to the federal and/or your state government.
If you end up owing taxes, or you do not want such a big refund, you can always update your W-4 to adjust your withholding amount.
Maximize Your Deductions
For tax year 2023, the standard deduction is $27,700 for married couples filing jointly and $13,850 for single taxpayers and married filing separately. You cannot itemize your deductions and take the standard deduction–you have to choose one or the other. While most taxpayers choose the standard deduction, it can make sense to itemize if the total will be more than that. Here are some of the most common tax deductions you may be eligible for:
- Mortgage Interest: If you have a mortgage on one or two properties, you can deduct the interest paid during the year.
- State and Local Taxes: Deduct up to $10,000 in property taxes paid plus state income or sales tax.
- Charitable Donations: Deduct up to 60% of your adjusted gross income in charitable contributions.
- Medical and Dental Expenses: Can be deducted if they exceed 7.5% of your adjusted gross income.
- Student Loan Interest: Deduct up to $2,500 (depending on your modified adjusted gross income) in interest paid on qualified student loans for yourself, your spouse, or a dependent.
New York State income tax deductions
You can itemize deductions on your state tax return regardless of whether you itemized deductions on your federal return. New York state itemized deductions include medical and dental expenses, taxes you paid, interest you paid, gifts to charity, casualty and theft losses, job expenses, and more.
Contribute to an HSA account
If you are enrolled in a high-deductible health insurance plan, you can save for out-of-pocket expenses in a Health Savings Account. HSA contributions are not taxed, lowering your overall taxable income, and qualified withdrawals are tax-free, too. For tax year 2023, you can contribute up to $3,850 for an individual plan and $7,750 for family coverage.
Contribute to retirement accounts
Contributions to traditional IRAs and 401(k) plans are also made from pre-tax income, lowering your overall taxable income for the year. For tax year 2023, the IRA contribution limit is $6,500 ($7,500 for age 50+) and the 401(k) contribution limit is $22,500.
Take Advantage of Tax Credits
In addition to itemized deductions, you may be eligible for certain tax credits on your federal and state income tax returns.
Common tax credits available in New York include:
- Child and Dependent Care Credit: Expenses incurred to enable you to work or seek employment. Based on income and number of dependents.
- Earned Income Tax Credit: NY has its own version of the federal tax credit for low and moderate-income families and individuals.
- Empire State Child Tax Credit: A tax credit for families with children under the age of 17.
- Property Tax Credit: NY offers tax credits for eligible homeowners and renters.
- School Tax Relief Program: Property tax relief for homeowners.
- Farm Workforce Retention Credit: Provides incentives for hiring and retaining farm employees.
Popular federal tax credits include the Earned Income Tax Credit (EITC) for moderate- and low-income taxpayers, Child Tax Credit for children under age 17, and American Opportunity Tax Credit for qualified higher education expenses. In addition to these mainstays, temporary tax credits are available for electric vehicle purchases and certain energy efficient home improvements. Talk to your tax advisor to learn more.
Set Yourself Up For The Future
Now that you understand how tax refunds work, let’s look at how to maximize yours with these tax refund tips. It’s always tempting to spend it, and you will certainly hear plenty of advertisements around tax season suggesting what you could spend your refund on. However, we recommend setting yourself up for the future by taking one of these steps with at least part of your refund.
- Make an extra contribution to your retirement account.
- Start or build your emergency fund in a High Yield Savings Account.
- Invest in stocks, bonds, mutual funds, or ETFs in a regular (non-retirement) brokerage account.
- Pay down high-interest debt such as credit card balances or other loans. This will save you money on interest in the long run, freeing up more money to contribute to your savings.
Talk To A Professional
When it comes to filing your tax returns, you can do it yourself for free via IRS.gov or the IRS2Go app. Software programs like TurboTax and H&R Block are also options. However, if your tax return isn’t simple, you may find it easier to work with a tax professional. They can also help you maximize your deductions and tax refund.
Tax professionals who can prepare your return for you include CPAs, attorneys, and other advisors with an IRS Preparer Tax ID Number. They can provide a range of tax-related services, including:
- Tax preparation
- Tax planning
- Filing extensions
- Amending returns if needed
- Correspondence with the IRS or state tax authorities
- Tax compliance for individuals and businesses
- Estate and gift tax planning
- Tax education to help you make better informed decisions and be better prepared in the future
About Palisades Credit Union
Founded in 1941, Palisades Credit Union serves all persons who live, work, worship, or attend school in Rockland County, New York; Bergen County, New Jersey; employees of the State of New York who work in one of the five New York City boroughs; members of Radio and Television Broadcast Engineers Local 1212; International Brotherhood of Electrical Workers, AFL-CIO, in New York, NY; and employees of USA Networks who work in or are paid from New York, NY.
Our mission is better banking, better solutions. To become a member, contact us or visit one of our branch locations. We look forward to providing you with the right financial solutions to meet your needs.
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