5 Financial Moves to Help Maximize Your Tax Refund This Year

As the temperatures begin to cool and we try to figure out what this year’s holiday season will look like, it’s a good time to start thinking about other year-end rituals as well. When it comes to your money, the end of the year is a good time to start thinking about how to position yourself to make sure you’re not paying more taxes than you should.

So before we bid adieu to 2020, here are five steps you can take now to maximize your tax refund this year.

Evaluate your witholdings

In 2017, Congress passed the Tax Cuts and Jobs Act, which authorized several changes to federal tax law when it became a law in 2018. Perhaps the most important change is that it reduced marginal tax rates, which means employers began withholding fewer taxes from employee paychecks.

“This change actually caused many people to be under-withheld and owing taxes,” says Phil Roemaat, Vice President of Advanced Planning at Northwestern Mutual.

Though this was more of an issue in 2018 and 2019, if this problem affected you in past years and you didn’t take steps to correct it, keep in mind that it will likely impact your tax return again this year.

Roemaat also suggests double-checking that you have chosen your filing status correctly, as it can have a major impact on your tax bill. Typically, you’ll likely only need to adjust your filing status if you’ve gone through a major life change in the past year. But which filing status you choose (such as single, married filing jointly, married filing separately, head of household or qualifying widow) will determine not only which tax bracket applies to you, but also which deductions and credits you may be eligible for.

Determine your deductions and credits

One of the surest ways to increase your refund is to make sure that you’re claiming all of the deductions and credits that are available to you. Maximizing your deductions will essentially lower your tax burden, which means you can keep more money in your pocket.

“Good tax planning often involves tax deferral, which means accelerating deductions and deferring income,” Roemaat says. You’ll first need to determine whether you should claim the standard deduction or an itemized deduction.

For the 2020 tax year, the standard deduction is:

• $12,400 for single filers or married individuals filing separately,
• $18,650 for heads of households and
• $24,800 for those who are married and filing jointly.

Itemizing your deductions is a good idea if the total amount is greater than your standard deduction.

But figuring out which deductions and credits you qualify for can be tricky — especially if you aren’t a tax pro — because there are so many and each carries its own eligibility requirements. So if you’re considering itemizing your deductions, Roemaat recommends working with a tax professional.

Maximize your retirement account contributions

Most people use a 401(k), 403(b), 457 plan or an individual retirement account (IRA) to save for their golden years. Contributing to these accounts can lower your taxable income because contributions are made pre-tax. These accounts also grow in a tax-deferred way. Because of the tax benefits they provide, there are limits to how much you can contribute each year:

• 401(k), 403(b): $19,500 ($26,000 for individuals 50 or older)
• Eligible 457 Plan: $19,500 (Special catch-up rules apply to those within 3 years of retirement)
• IRA: $6,000 ($7,000 for individuals 50 or older)

Contributing to a Roth 401(k) or IRA also has tax benefits, but these contributions will not lower your tax liability this year.

Generally speaking, Roemaat says it’s a good idea to make sure you’re contributing enough to your employer-sponsored plan (if you have one) to claim all any matching funds; after all, that’s free money. A financial advisor can help you figure what makes the most sense for your personal situation.

Make a plan for giving back

Charitable giving can be another excellent means of lowering your tax burden and maximizing your return. It’s possible to deduct a percentage of the value of donations that you make to public charities, which effectively reduces your taxable income for the year.

“Normally, the rule is that you are limited to deduct cash gifts to public charities up to 60 percent of your adjusted gross income for tax purposes,” says Roemaat. “But the passage of the CARES Act removed this limitation for the 2020 tax year.” Note this change does not include gifts of securities, clothing or gifts to donor-advised funds.

Don’t itemize? The CARES Act also creates a $300 above-the line deduction for cash donations made to public charities by filers who claim the standard deduction. Because of vague statutory language, this is the same regardless of your filing status.

Consider hiring a professional

Of course, there are also many other strategies you can use to maximize your tax refund. These include things such as bunching itemized deductions, harvesting capital losses, deferring income and contributing to other tax-advantaged accounts (such as health savings accounts or a 529 college savings account). The options are numerous and often complex, so you’re not alone if you find the prospect of delving into everything that goes into crafting a winning tax strategy less than appealing.

Roemaat recommends connecting with both a financial advisor and tax professional who are familiar with your personal financial situation and can help ensure that you claim all of the right deductions, withhold the right amount of taxes from your paycheck, and file using the most advantageous status. Making sure you have a strategy tailored to your financial situation would be a great way to kick off the new year.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.

All investments carry some level of risk. No investment strategy can guarantee a profit or protect against loss. This is for informational purposes and not investment advice.