When tax time rolls around, are you tempted to run away or hide under a rock? Totally understandable. After all, taxes can be kind of scary, simply because there are so many laws to keep up with and deductions to understand. And who knows the difference between a W2 and a 1040, anyway?
If you file your own taxes, there’s a big chance you might be overlooking some tax deductions that can save you quite a bit of money. In this post, I’ll start by sharing some of the most common tax deductions you should keep in mind when filing your taxes. Because who wants to leave money on the table during tax time?
And if you do manage to snag some extra cash from the IRS in the form of a refund, I’ve included some things you can do with your refund that will set you ahead of the game financially as the new year begins. And what could be better than that?
Tax Deductions You Shouldn't Miss Out On:
1. State and Local Taxes (SALT)
Though some key changes were made to the tax laws starting in 2018, most people can still qualify to deduct the cost of state and local taxes. This is especially important if you reside in a high-tax state like California, New Jersey, or New York. Though you won't have to provide extensive documentation to claim this deduction (praise hands!) you may want to check out this article for more details about how the new limits will affect your situation.
2. Charity contributions and volunteering
If you gave money to a charitable organization as a donation, you can write this off on your tax return. In addition, if you volunteered at a charity and incurred mileage or travel expenses as a result, you might be able to include these costs as a tax deduction. Note that charitable contributions may not come into play on your taxes as much now that the standard deduction has nearly doubled under new tax laws set forth in 2018.
3. Child-care costs
Got a child or dependent under the age of 13? You may qualify for a tax credit on your costs for daycare. Same for having a babysitter or au pair, or even summer camp fees. All can qualify as tax deductions in some cases. This can add up to 35% of qualifying expenses up to $3,000 for one child OR as much as $6,000 for 2 or more children or dependents.
4. Medical expenses
You may already know that in some cases, medical expenses can be written off as a tax deduction. But in the past, applicable expenses had to total more than a whopping 10% of your annual income. That threshold effectively disqualified most people from receiving this tax benefit. So be aware that now, changes to the tax code only require medical expenses to reach 7.5% of your income.
5. Interest on a home equity loan
Did you take out a home equity loan or line of credit in 2018? If so, you might be able to deduct any interest you paid, as long as the HELOC was used for "substantial" improvements to your home.
6. Mortgage interest
If you own a home, you are eligible to deduct the interest you paid on your mortgage as long as the loan was $750,000 or less.
7. College credit
You may qualify to claim a Lifetime Learning Credit for any qualified tuition and associated expenses. This benefit is paid to students with an income of less than $65,000 who are enrolled in eligible educational institutions. This credit is worth up to $2,000 per tax return per year. This also applies to any qualified education expenses you pay for a dependent child or your spouse.
Clever Girl tip: Be sure to check the IRS guidelines or talk to your tax preparer for specific details before you file any of these tax deductions to ensure that you meet the qualification requirements. It’s also important that you have proper documentation and records for any deductions you file for.
How to Make Your Tax Refund Work For You
Now that you've gone through all of the possible credits and deductions listed above, hopefully, you're coming out in the black this year instead of owing taxes. Maybe you're even due a tax refund from the IRS. But as tempting as it can be to go out and splurge when that check comes in the mail (or is deposited into your bank account), consider using it to get yourself ahead financially!
Receiving a tax refund check can make a big difference toward improving your finances and achieving your financial goals. So it’s a good idea to create a clear plan for what to do with your refund in advance of receiving it. This way, all that money doesn’t just slip through your fingers unaccounted for.
Here are six things to do with your tax refund that can make a huge difference for the better when it comes to your finances. Depending on your unique financial circumstances, you may choose to do one or a combination of the suggestions I mention below:
1. Pay off your high-interest debt
Your tax refund check can make a huge dent in your debt repayment process and help accelerate the timeline in which you are able to pay off your debt. Now wouldn't that be awesome? If you've been on the fence about whether to use your refund to pay off debt or not, go ahead and do it—you won't regret getting closer to your debt freedom.
2. Bulk up your emergency savings
Having a fully-funded emergency account can contribute to your financial peace of mind and more importantly help you weather an unplanned circumstance or emergency. Using your tax refund to bulk up your emergency savings can go a long way.
3. Invest in the stock market
Your tax refund could be a great way to get started with investing in the stock market if this is something you've been considering. You can either open up an account with a major brokerage firm or use a robo-advisor and start investing in things like index funds and ETFs. It's important to do your research before you start investing! At the very least, try to have a basic understanding of how the stock market works. Here is one of my favorite investing books for beginners.
4. Catch up on your retirement savings
If you contribute to an IRA or another type of retirement savings, you can use your tax refund to increase your retirement savings. This works if you haven't quite maxed out your contributions for the prior year. You have until the tax filing deadline in April of the following year to max out your contributions for the prior year.
A couple ways to do it: 1) You can pay your contributions directly to your IRA or 2) you can increase the automatic deductions your employer takes from your paycheck for a couple pay periods until it equals the amount of your tax refund.
5. Put money toward a short- or mid-term goal
Thinking of starting a business? Saving to buy a house or car? Putting your tax refund toward your short- or mid-term savings goal can help accelerate how quickly you are able to achieve your goal.
6. Invest in your personal development and or help others
Investing in yourself is always a sound investment. Especially if you invest in things to improve your knowledge or skill set. It could be courses or certifications to help you get a better paying job, help you do better at work or help you excel in business.
You can also consider giving to charity or to a worthy cause that you are passionate about. The process of giving back in itself has its own rewards!
It's all about putting your dollars to work for you and having a plan in advance will make the process so much easier. With a plan in place, you are less likely to blow your refund on frivolous or unplanned items.