Tax season is a great opportunity to boost your finances… if you plan carefully. By understanding tax credits, deductions, and strategies to optimize your return, you can maximize your refund and put the cash to the best use for your financial goals. Let’s explore practical ways to maximize your tax refund this year.

Understand Tax Credits and Deductions

Tax credits and deductions reduce the amount of taxes you owe, but they work in different ways. Knowing how to use them and some of the most common credits and deductions you may qualify for is key to maximizing your refund.

What Are Tax Deductions?

Tax deductions reduce your taxable income, which in turn lowers the amount of tax you owe. For example, if you earn $40,000 in a calendar year and have $5,000 in deductions, your taxes would be calculated as if you earned $35,000 per year, not the entire $40,000. Popular deductions include:

• Standard Deduction: Automatically reduces your taxable income if you don’t itemize, which applies to most households. The standard deduction typically goes up every year. You can find the latest standard deduction at the IRS website or through your favorite tax prep software.
• Itemized Deductions: Households with more deductions adding up to more than the standard deduction can itemize their deductions for potentially additional tax savings. Itemizations apply to mortgage interest, state taxes, and charitable donations, among others. Student loan interest is deductible even if you don’t have enough other deductions to itemize. Limits to each deduction often apply.
• Work-Related Expenses: Depending on your profession, you may have opportunities to deduct work-related expenses. If you’re self-employed, you may be able to deduct home office expenses, mileage, and business-related purchases.

What Are Tax Credits?

Tax credits lower your tax bill dollar-for-dollar, making them arguably more valuable than deductions. For example, if you owe $2,000 in taxes and qualify for a $1,000 tax credit, your tax bill drops to $1,000. Some common tax credits include:

• Earned Income Tax Credit (EITC): Available to low- to moderate-income workers and families.
• Child Tax Credit: Families with children under 17 may qualify for a credit for each child.
• Education Credits: Credits include the American Opportunity Tax Credit or the Lifetime Learning Credit, which apply to varying households based on education expenses and income.

Tips to Maximize Your Refund

1. File Early and Accurately

Filing early can help you avoid last-minute stress and reduce the risk of errors. Make sure all of your tax documents are accurate and complete. Double-check important information, such as Social Security numbers and income totals. Whether you do your taxes online or hire an accountant, reviewing your tax return in detail is a good idea before filing with the IRS.

Did you know Payactiv members get a discount on TurboTax? Learn more here.

2. Claim All Available Credits and Deductions

Research which credits and deductions apply to you. Use online tools or consult a tax professional to ensure nothing is missed. Review both federal and state credits and deductions, as each works differently. 

Even small deductions add up. Don’t overlook common deductions like student loan interest or moving expenses for a new job. You may also be able to take advantage of deductions for energy-efficient appliances, water-efficient fixtures, electric vehicles, and much more.

3. Contribute to Retirement Accounts

Contributions to traditional IRAs or employer-sponsored retirement plans, like a 401(k), can reduce your taxable income in the year of your contribution. For example, if you put $5,000 into a traditional IRA or 401(k), your taxable income is lowered by $5,000.

Tip: If your employer offers 401(k) or other retirement contribution matching, be sure to take advantage. Not only does it lower your taxes, your employer may be essentially giving you a raise as a reward for saving and investing for retirement.

4. Keep Track of Work Expenses

If you’re self-employed or have side gigs, track all related expenses throughout the year. Accounting apps and spreadsheets can help you stay organized. Potential deductions include:

• Internet and phone bills (for business use)
• Office supplies
• Business travel and meals
• Supplies and purchases directly related to the business

Some jobs, like teachers, may also be able to get a lower tax bill with deductions if they spend their own money on job-related supplies.

5. Use Tax Software or a Professional Preparer

Tax software can identify deductions and credits you might miss on your own. If your situation is complex, hiring a tax professional can help ensure you maximize your refund while avoiding costly errors.

However, most people with basic computer skills can save a lot of money using online tax software rather than an accountant. Many tax apps offer free filing if you have simple taxes and don’t exceed a certain income threshold.

6. Check for Errors Before Filing

Simple mistakes can delay your refund. Review your tax return carefully to ensure accuracy. Double-check these common mistakes:

• Correct spelling of names
• Accurate Social Security numbers
• Correct bank account details for direct deposit

7. Opt for Direct Deposit

Choosing direct deposit for your refund is faster and more secure than waiting for a check in the mail. You can also split your refund into multiple accounts, like savings or retirement accounts, to reach financial goals.

Payactiv members can have their direct deposit go straight to their Payactiv account, where they can split the refund into a dedicated savings bucket and access their cash via debt card as soon as it’s available in their accounts. Download the Payactiv app in the Apple App Store or Google Play Store to get started.

8. Adjust Your W-4 Form

If you received a small refund or owed last year, consider adjusting your W-4 form at work. Increasing your withholding can help you avoid underpayment penalties and potentially result in a larger refund.

While you’ll get a little less every payday, the bigger refund may help you save throughout the year, as you’ll get a bigger refund, while limiting the risk of owing taxes when filing your return next year.

Common Pitfalls to Avoid

• Procrastinating: Waiting until the last minute can lead to rushed filings and errors. If you miss the deadline, you may owe added interest or penalties.
• Overlooking State Taxes: Many people focus on federal taxes, but state tax refunds can be significant, too.
• Ignoring Tax Changes: Tax laws change frequently, so stay informed about new credits and deductions that may apply to you. Tax software like TurboTax, which you can get at a discount through Payactiv, updates annually for tax law changes.

Put Your Refund to Good Use

Once you’ve maximized your refund, think strategically about how to use it. Some smart ways to allocate your refund include:

• Building an Emergency Fund: If you don’t already have one, save your refund for unexpected expenses. Putting your emergency fund into a dedicated high-yield savings account or a savings goal in the Payactiv app helps you avoid spending outside of emergencies.
• Paying Down Debt: Paying off high-interest credit card balances should be a top priority for most people with credit card debt. A windfall tax refund can help you chip away at your balance or pay it off completely. Paying off higher-interest auto, student, and personal loans is also a good use of a tax refund.
• Investing in Your Future: If you’re debt-free and have an emergency fund, consider contributing to retirement accounts or starting a side hustle to increase your income.
• Improving Your Skills: Invest in education or training to boost your income potential. A professional certification or trade school diploma could unlock higher-paying jobs and improve career opportunities.

Extra Focus on Taxes Can Pay Off

Maximizing your tax refund doesn’t have to be complicated, but spending a little extra time to ensure you file accurately and make the most of your refund can pay off big time. By staying organized, claiming all eligible credits and deductions, and filing correctly, you can make tax season work for you. Take charge of your taxes this year and boost your finances.

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