6 Signs You Are Overpaying on Your Taxes
There are only two certainties in life: death and taxes. While one is unavoidable, there are some great ways to avoid paying too much in taxes.
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Many Americans are overpaying and don’t realize it. From missed deductions to tax return mistakes, millions of taxpayers pay too much each year.
If you’re looking to keep more of your hard-earned paycheck, here are six signs that you might be overpaying on your taxes.
You Get a Massive Tax Refund Every Year
Do you have a huge tax return year after year?
A sure sign that you are overpaying your taxes during the year is a tax refund in the thousands. This indicates you are withholding far too much from your paycheck and essentially giving the government an interest-free loan that it pays back the next year.
In 2021, the government issued over $1.1 trillion in tax refunds.
While it can be a simple way to save money, getting a big tax refund means your paychecks are smaller than they need to be. This can happen when you have a major life change — get married, buy a home, etc. — without changing your withholding.
If you want a bigger paycheck and smaller refund, consider talking to your HR department to adjust your withholding amount.
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You Don’t Contribute to Retirement
If you are not contributing to your workplace retirement account or a traditional IRA, you might be missing out on tax savings.
Most companies offer some type of retirement plan — such as a 401(k), which lets you put in a small percentage of your paycheck every payday. This helps you invest toward retirement; but, at the same time, your contributions are tax deductible. This means you pay less in taxes throughout the year.
If your workplace offers a company match, you could be missing out on free money. So, if you want to save money on taxes and access bonus funds from your job, talk to your HR department about the workplace retirement plan.
You Made a Mistake on Your Tax Return
If you didn’t fill out your tax return properly, you could end up paying more than you’re supposed to.
If you have forgotten something on your tax return, you can amend it by filling out form 1040-X and correcting the mistake. This can help you retrieve any lost tax refund that you may have missed, but you need to do it within three years of your original filed return.
You Don’t Take Advantage of Tax Credits and Deductions
While the IRS offers a huge number of tax deductions and credits, you can get the money back only if you claim them on your tax return. While most tax software or professional tax preparers will guide you through the most common deductions, there are some you might forget about, including:
State sales taxes
Jury pay paid to your employer
Refinance points on your mortgage
Child and dependent care tax credits
Working with a licensed tax professional is one of the best ways to optimize your tax situation and find some of these hidden deductions and credits.
You Forgot the Cost of Your Home Improvements
What does home improvement have to do with your taxes?
One of the biggest tax deductions available is the principal residence exclusion on the sale of your personal home. This deduction allows you to exclude up to $250,000 of capital gains from the sale of your home (or $500,000 if married filing jointly), assuming you’ve lived in the home two out of the last five years.
This is calculated by subtracting your purchase price from the sale price (minus fees). So, if you bought the home for $200,000 (your cost basis) and sold it for $500,000 (after fees), you would have a $300,000 gain. But, with the $250,000 exclusion, you would have to pay taxes only on a $50,000 long-term capital gain.
You also might be able to avoid taxes altogether if you keep track of the home improvements you have made. If you installed a new roof, built a fence on the property, remodeled the kitchen or made any other home improvements, you can add this to the cost basis of your home.
In the example above, if you made at least $50,000 in home improvements, this increases the basis of your home to $250,000 and lets you avoid any capital gains on the sale ($500,000 sale minus $250,000 basis = $250,000 gain – $250,000 exemption = $0 gain).
You Don’t Donate to Charity
If you don’t donate to charity, there’s a chance you are missing out on some tax savings. If you typically itemize your taxes, giving to nonprofit organizations can add another deduction to your tax return.
While cash gifts are easy to track, you also can write off donations to places such as Goodwill. You can deduct up to the fair market value of the donation as long as you keep donation receipts. For items over $5,000, you may need an official appraisal of the item to deduct it.
You might be overpaying your taxes, but you don’t have to. There are several ways to lower your taxes, and working with a licensed tax professional can help. If you are getting a big refund each year, or maybe you feel like you pay too much, you might be able to do something about it.
The U.S. tax code is complicated; but, once you learn about a few ways to lower your tax burden, it can free up more money for you every paycheck. Just make sure you let a professional take a look at your taxes before claiming anything you are unsure of.
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