Hidden Ways To Boost Your Tax Refund
OVERVIEW
Here are five tried-and-true ways to reduce your tax liability at tax time. Pay no more than you owe, or even increase your tax refund.
For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.
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While Americans may disagree on how the government spends their taxes, at tax time, many of us are looking for ways to pay no more than we owe or even boost our tax refunds. These strategies go beyond the obvious to give you tried-and-true ways to reduce your tax liability.
Rethink Your Filing Status
One of the first decisions you make when completing your tax return choosing a filing status can affect your refund’s size, especially if you’re married. While approximately 96% of married couples file jointly each year, a joint return is not always the most beneficial option.
- status often requires more effort, but the time you invest can offer tax savings under the right conditions. For example, if one spouse has a lot of medical expenses, such as COBRA payments resulting from a job loss, computing taxes individually might allow for a larger deduction.
- The Child Tax Credit is available to separately filing spouses. For 2020, the credit is $2,000 per child under 17 years old in 2020, and it can now be claimed by a separate filer with less than $200,000 in adjusted gross income .
- For your 2021 tax return that you will prepare in 2022, the Child Tax Credit is expanded by the American Rescue Plan raising the per-child credit to $3,600 or $3,000 depending on the age of your child and includes 17 year-olds. The credit is also fully refundable for 2021. To get money into the hands of families faster, the IRS will be sending out advance payments of the 2021 Child Tax Credit beginning in July of 2021. For updates and more information, please visit our 2021 Child Tax Credit blog post.
- Calculating your taxes both ways will point you in the higher refund direction.
- When you use TurboTax, well do this calculation for you and recommend the best filing status.
Does Getting Unemployment Affect My Tax Return
As for jobless benefits, some social media buzz has been implying that the IRS is taking away money from people who received unemployment benefits.
For many, what’s happening is that temporary tax breaks for 2020 on unemployment compensation are no longer available on 2021 tax returns.
As part of the American Rescue Plan, many taxpayers were not required to pay taxes on up to $10,200 in unemployment benefits received in 2020. The exclusion was up to $10,200 of jobless benefits for each spouse for married couples.
Not everyone was covered by that temporary 2020 break.
The special provision to waive taxes on some unemployment income applied only to those who made less than $150,000 in adjusted gross income in 2020.
What’s confusing now: The tax break on jobless benefits which also extends to many state income tax returns, including Michigan only applied to 2020, not 2021.
Many people who are financially strapped when they lose a job often do not have taxes withheld. They could owe taxes when they file their 2021 income tax returns.
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Who Should Use H& r Block
For DIYers, H& R Block makes tax preparation simple by walking them through the process with interview-style questions, clear instructions, and in-depth explanations for different income types, deductions, and tax credits.
Customers can prepare their tax returns online, have their DIY return reviewed by an expert, or turn their return over to a virtual tax pro to handle preparation and filing from start to finish.
This range of options makes H& R Block a good tax software tool for people who want to try filing on their own, but also want the option to call in professional help if they have questions or get stuck.
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H& r Block Ease Of Use
Preparing your tax return online with H& R Block is similar to sitting down with a tax preparer. The software walks you through the tax preparation and filing process with a series of interview-style questions.
As part of my review, I went through the process of preparing three sample returns. Hereâs how long it took me to get from start to filing for each one:
- Single taxpayer, no dependents, W-2 income and the student loan interest deduction: 23 minutes
- Single taxpayer, no dependents, self-employment income, federal and state estimated tax payments: 30 minutes
I did run into one stumbling block while preparing the sample return for a married couple filing jointly. On the Alabama state return, the software doubled their income, showing they had $260,000 of taxable income rather than $130,000 and owed taxes and an underpayment penalty. After spending several minutes going back through the interview forms, I couldnât figure out how to fix the issue without deleting everything and starting over, so I gave up.
Such a problem could really derail an inexperienced DIYer and potentially even lead to significantly overpaying their tax return if they didnât understand what was going on and reach out to tech support .
Despite this issue, I found H& R Blockâs interface to be pretty user-friendly. A banner on the left-hand side of the screen keeps a running tally of the estimated federal and state refund or amount due throughout the process.
You have two options:
How Much Can I Get With The Ctc
Depending on your income and family size, the CTC is worth up to $3,600 per child under 6 years old and $3,000 for each child between ages 6 and 17. CTC amounts start to phase-out when you make $75,000 . Each $1,000 of income above the phase-out level reduces your CTC amount by $50.
If you dont owe taxes or your credit is more than the taxes you owe, you get the extra money back in your tax refund.
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How To Claim The Unemployment Tax Break
Filing your taxes online with H& R Block our top pick for tax software this year or TurboTax is easy. All you need to do is create an account and upload your income statements and other tax documents. Both companies offer free plans for simple tax situations.
You’ll be guided through a question-and-answer style process to fill out your federal return, and your state return if you’re filing one. To report unemployment benefits from 2020, you need Form 1099-G . You should have received this form by now, either in the mail or as a digital document through your state’s unemployment website.
Whichever tax platform you’re using will ask for the total amount of benefits received in 2020, which you can find in Box 1 on Form 1099-G. In Box 4, you’ll see the amount that was withheld for federal taxes, if any. These are the numbers you need to report. Then, H& R Block or TurboTax will apply the exclusion amount and calculate your remaining taxable unemployment compensation, if any.
Double-check that the amount on your 1099-G reflects the benefits you actually received 2020. Unemployment fraud is rampant and it’s possible a claim was made in your name. Only report the total benefits you received for legitimate claims. If the number is wrong, reach out to your state unemployment office for a corrected form.
If at any point you need help from a tax professional, you can pay extra to get instant access to someone via video chat or phone .
Free Tax Software Companies Can Get You Even With Free Software Offers
Most of the companies on this list offer free federal filing for a subset of taxpayers. The trouble is that each company has different criteria for free filing. Some only offer free filing for a small subset of filers . Other companies offer free federal filing but require payment for state filing.
The so-called free-filing situation has become even more complex due to Covid-19. During the 2020 filing season, many companies expanded their Free offering to cover unemployment income and credits associated with the American Rescue Plan. While some companies have retained these expanded free offerings this year, others have reverted to the more restrictive options.
Whether companies have retained expanded offerings, many companies retain gotchas related to student loan interest deductions, retirement contributions, daycare expenses, and HSA contributions. Almost every major filing service requires an upgrade to the Deluxe tier when you start claiming these credits. This can feel like a super-frustrating money grab when you dont know you have to pay until youre an hour into the process and about to finish filing.
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Box : Dependent Care Benefits
These are the contributions to Dependent Care Assistance Program made through payroll deductions.
Contributions to DeCAP are not subject to federal, social security, and Medicare taxes. The amounts in Box 1 for taxable wages and Boxes 3 and 5 for social security and Medicare wages are reduced by the amount of the contribution.
Why Must Some Amend Their Returns
Beginning in May and continuing into the summer, the IRS will automatically refund taxpayers who filed their returns without claiming the new tax break on unemployment benefits, it said, but this was in regards to their federal return.
Some states may still opt to tax jobless aid, tax experts say. That means some taxpayers may have to file an amended return to get their maximum refund if the unemployment tax break now makes them eligible for additional tax credits that were not claimed on their original return, or if they mistakenly excluded their unemployment income in states that choose to still tax the jobless aid.
Otherwise, the IRS said it will recalculate returns of taxpayers by incorporating the $10,200 exclusion and either refund them or apply it to other taxes they owe.
While many states will follow suit and automatically refund taxpayers, there are a handful of states that are requiring taxpayers to file an amended tax return to receive the benefit of the unemployment tax break if they filed before the American Rescue Plan was signed, says Curtis Campbell, president of TaxAct, a tax preparation software.
This varies by state. Taxpayers who filed their returns before the American Rescue Plan became law in March may need to file an amended state tax return to get a state refund.
New Mexico, for instance, has advised taxpayers to amend their returns if they were filed before mid-March.
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Planning For 2021 Taxes If Youre Still Unemployed
The tax exemption for $10,200 in unemployment benefits currently only applies to unemployment income you collected in 2020, even though the bill also extended weekly $300 federal unemployment benefits payments through September.
You should consider any unemployment benefits you receive in 2021 as fully taxable. If you can afford to do so, avoid a surprise bill and penalties next tax season by electing to have taxes withheld from your weekly benefits payments or by paying quarterly estimated taxes throughout the year.
You can elect to have 10% of your unemployment benefits withheld from your weekly check. Even if you did not select this withholding on your original claim, you can file Form W-4V with your states unemployment office to begin 10% tax withholding on future unemployment payments.
You can also forgo automatic withholding and instead pay estimated quarterly taxes on your unemployment income. Use Form 1040-ES to figure and file your quarterly payments. If you choose to pay estimated taxes on your unemployment benefits, the first payment is due April 15, 2021.
Who Should Use H& r Blocks Tax Service
H& R Block offers an easy-to-navigate interface with clear, jargon-free guidance and many ways to access extra help. Its a premium product with a price tag to match, so its best for people who want extensive help options and those who qualify to use the free version.
If you have a complicated tax situation, then TurboTax might lead you through the process better though prices are slightly higher. TaxSlayer could be a good program for confident filers who dont need tax guidance and want the lowest-cost option.
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How H& r Block Stacks Up Against The Competition
H& R Block provides an easy-to-use platform, similar to meeting with a tax preparer. H& R Block walks you through an interview process, much like TurboTax, but itâs a little bit cheaper. TurboTax charges up to $119 for federal tax filing for its highest âdo-it-yourself taxâ package, while H& R Block charges up to $109.99 for federal tax filing for a similar package.
Similar to other online tax software programs such as TurboTax and TaxSlayer, if you need help along the way, youâve to upgrade to another pricing tier or pay extra to get it. But whatâs unique about H& R Block is that their options for tax experts help go beyond your computer screen. Starting at $80 to file federal tax returns , you can work with a tax professional virtually, in an H& R Block office, and by dropping off your tax documents at an office.
And while H& R Block tries to upsell you while filing your taxes, itâs not overwhelming compared to TurboTax, which attempts to upsell you multiple times while using the software.
What Else To Know About Unemployment Tax Refunds
The IRS has provided some information on its website about taxes and unemployment compensation. But we’re still unclear on the exact timeline for payments, which banks get direct deposits first or who to contact at the IRS if there’s a problem with your refund.
Some states, but not all, are adopting the unemployment exemption for 2020 state income tax returns. Because some get full tax unemployment benefits and others don’t, you might have to do some digging to see if the unemployment tax break will apply to your state income taxes. This chart by the tax preparation service H& R Block could give some clues, along with this state-by-state guide by Kiplinger.
Here is information about the child tax credit for up to $3,600 per child and details on who qualifies.
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Tax Returns And Third Stimulus Payment
The bills mid-tax season passage may have caused a lot of confusion for unemployed taxpayers trying to determine the best time to file.
But the good news, says , senior fellow at the Urban-Brookings Tax Policy Center, is that you will receive the full amount youre owed, even if there is a delay.
For taxpayers whose stimulus eligibility was processed based on 2019 returns, at some point possibly later this year, but definitely when they file a tax return next year the IRS will bump up the money and send an additional amount or what they would have received based on 2020 income.
In other words, you may have to reconcile your payment using a similar claim to the Recovery Rebate Credit for the previous two stimulus payments.
Do You Owe Some Money
Your federal income tax refund could be smaller because of some past debt that’s owed.
The Treasury Offset Program is able to immediately reduce your tax refund for specific past-due debts, including past due state income taxes and child support.
In FY 2021, the Bureau of the Fiscal Service collected $4.1 billion from 3,491,938 offsets of federal income tax refunds.
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Irs Free Fillable Forms
The IRS offers free fillable forms from mid-January through mid-October . If youre used to filing your taxes with pen and paper, you might decide that these forms are relatively easy to use. Generally, we prefer the ease of the tax filing software above. But the fillable forms could make sense if you dont have much in the way of income or expenses.
What To Do If You Have Filed Already
If you collected unemployment insurance in 2020 but you already filed your tax return, you are still eligible for the exemption under the American Rescue Plan. You do not need to take any action to claim the money youre owed. Instead, the IRS will automatically refund the money.
The first round of payments will begin in May and continue over the summer, according to the IRS. Youll either receive a refund or the amount will be deducted from your taxes owed.
There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return, the agency noted in a recent release.
This includes, for example, taxpayers who claimed the Earned Income Tax Credit but are eligible for an increased credit under the new exemption. While youll automatically get a refund for the exemption, youll need to file an amended return to get a larger credit.
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Most Don’t Have To File An Amended Return
Most taxpayers don’t need to file an amended return to claim the exemption. If the IRS determines you are owed a refund on the unemployment tax break, it will automatically correct your return and send a refund without any additional action from your end.
The only reason to file an amended return is if the calculations now make you eligible for additional federal credits and deductions not already included on your original tax return, like the Additional Child Tax Credit or the Earned Income Tax Credit. The IRS said it will be sending notices in November and December to people who didn’t claim the Earned Income Tax Credit or the Additional Child Tax Credit but may now be eligible for them.
If you think you’re now eligible for deductions or credits based on an adjustment, the most recent IRS release has a list of people who should file an amended return.
The average IRS refund for those who paid too much tax on jobless benefits is $1,686.