5 Tax Tips to Get a Bigger IRS Refund

Tax Tips to Get a Bigger IRS Refund

Whenever April 15th arrives every year, we all worry about filing our tax returns and how to get a higher IRS refund. Although income tax is not something we can run away from, there are some ways to reduce it. We mean the legal means of saving taxes where you make your money work for you and take advantage of that. If you are wondering how you can do that, this article is just for you.

Check out the efficient investment tips we have shared here that will help reduce your taxable income by a great margin. In the process, you get a bigger IRS refund and save yourself from losing out too much on taxes.

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1. Opt for an Individual Retirement Account (IRA)

Individual Retirement Accounts or IRAs are where your money grows tax-free. An IRA operates just like a 401(k) account but offers more advantages over the latter. Any person with a genuine income can easily open an IRA savings account and enjoy the tax benefits they offer.

You can invest up to $6,000 per year ($7,000 if you are over 50) in a traditional IRA and reduce your taxable income. Another good thing here is you can contribute to IRA even if you have a 401(k) plan at work.

Types of Individual Retirement Accounts:

  • Traditional IRAs
  • SIMPLE IRAs
  • Roth IRAs
  • SEP (Simplified Employment Pension) IRAs

Steps for opening an IRA:

  • First, decide the IRA type (traditional vs Roth) that suits you.
  • Then choose the right IRA platform/provider that suits your preference.
  • Open and then fund your account accordingly to get started.

And there you have it. Now you will be able to enjoy tax-deferred growth of your invested income till retirement.

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2. Create a Retirement Savings Plan

A retirement savings plan, as the name suggests, is a savings plan for your retirement. In simple words, it is a holistic approach to your retirement planning. There are different types of retirement savings accounts for different conditions. Some popular retirement accounts/plans include – 401(k), 403(b), and GIAs (Guaranteed Income Annuities).

With the advancements in medical technology, life expectancy is growing higher every year. It is time to start your retirement planning even if you are quite young. Besides securing your future after retirement, you can also get a fat IRS tax refund on your retirement savings investment.

 Benefits of a Retirement Savings Plan:

  • Big returns on reinvestment.
  • Reduction in taxable income.
  • Cost savings and general peace of mind.
  • Easy-made contributions through payroll deductions.

Steps for creating a Retirement Savings Plan:

  • First, take a look at your current income and see where you stand.
  • Choose a plan that meets your needs.
  • Decide how much you’ll save and invest.
  • Update your plan from time to time going ahead.

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3. Get Smart with Capital Gains Tax

People often withdraw their investments whenever there’s a need for money. This imbalance can often lead to higher capital gains tax. Typically, your short-term capital gains tax rates are much higher than your long-term rates. So, try holding on to your investments for more than a year to the advantage of the long-term rates.

There are also many other ways of gaining bigger IRS refunds with your capital gains. Some of the key strategies are as follows:

  • Try to book a smaller amount each year instead of booking a large amount every 4-5 years.
  • There are several tax advantaged accounts that allow you to grow your investments tax-deferred or tax-free. Your 401(k), Roth IRAs, 529 college savings accounts, etc., provide great tax advantages.
  • Defer capital gains with a 1031 Exchange.
  • Use a Robo-advisor to manage your investing smartly. This helps you employ smart tax strategies like tax-loss harvesting to prevent losses on capital gains tax.

4. Utilize Indexation Benefits

With Indexation, tax can be reduced by shifting money from fixed deposits to debt funds. This is especially useful with mutual funds and IRS funds because of tax deferment. Here, the original purchase price of your mutual funds is adjusted for inflation when you calculate capital gains at the end, and this helps lower your capital gains tax.

To put it simply, indexation will help you lower your taxable income by adjusting the purchase price to inflation. This makes Indexation an effective way of draining tax from your returns on investment.

Some notable benefits of Indexation:

  • Provides with an opportunity to earn bigger returns on investment.
  • Significantly reduces the capital gains.
  • Brings stability and liquidity to your investments.

5. Open a Health Savings Account (HSA)

Opening a Health Savings Account is another great strategy for reducing income tax. An HSA is more like your savings account. However, the money saved here must be used for your healthcare expenses. Although more beneficial to those who get their insurance coverage through HDHPs, it can still make a difference in your taxable income. A Health Savings Account lets you store money for medical expenses on a pre-tax basis.

Besides gaining tax advantage through a great IRS refund, this also helps you build an emergency medical savings fund that can save you from dire circumstances.

Benefits of opening an HSA:

  • Contributions made to an HSA are 100% tax-deductible.
  • Money earned in an HSA is tax-free.
  • All the distributions from your HSA throughout the core of its existence are also tax-free.

Conclusion

Reducing your taxable income is much easier now than it has been ever before. With the right strategies and management, you can easily make reductions in income tax or get a higher IRS refund than what you might be originally anticipating.

Following up on any of the above-mentioned plans will ensure you a rich boost to your annual return. Therefore, stop waiting and take action.

Tax preparation is now easier than ever. With SuperMoney, you can compare the best online tax preparation firms in the market based on customer reviews and choose the right one suitable for you.

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Also, don’t forget to download our FREE personal finance toolkit that can help you identify the best tools you can use to manage your wealth!

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