| Which is better? | | | | concerned about the tax liability line on your tax |
| Many people use their anticipated tax refund as a | | | | return than the refund or balance due line. There |
| type of "forced savings." If you're not disciplined | | | | are many ways to reduce your tax liability |
| enough or don't have a high enough income to put | | | | without much effort. |
| anything in savings during the year, your federal | | | | First, work to reduce your AGI or Adjusted |
| tax refund may serve well as a form of savings | | | | Gross Income. This is basically the total of all |
| for large purchases. But is this really the best | | | | your income minus any deductions and credits. |
| way to go? | | | | You can reduce your AGI by contributing to an |
| Big Refund Equals Lost Interest | | | | IRA or 401k. This money goes into that account |
| If you try to maximize your refund during the | | | | tax free and builds interest for you over the |
| year you're losing out on additional money. The | | | | years as you reach retirement. Not only is this |
| IRS is basically holding money you could be | | | | money reducing your AGI but it's another way |
| earning interest on. The IRS doesn't pay you | | | | for you to save. Student loan interest |
| interest on money you've overpaid toward your | | | | payments, tuition and expenses, alimony and |
| taxes. So, you are basically giving the | | | | other items also reduce your AGI, so look for |
| government an interest-free loan. | | | | ways to bring this amount as low as possible. |
| At the beginning of the tax year, use a free | | | | Second, look at itemizing your deductions. |
| calculator to determine approximately what your | | | | Compare the amount you can deduct by taking |
| tax liability will be at the end of the year. Adjust | | | | the standard deduction to the amount you'd get |
| your withholding accordingly so you're not | | | | by itemizing. An online tax preparation site will |
| overpaying into the system. Take the additional | | | | ask you the pertinent questions to add up your |
| money in your paycheck and have it automatically | | | | itemized deductions and then give you the one |
| deposited into an interest-bearing savings | | | | that will save you the most money. Deductions |
| account. Not only will you now make money on | | | | that are often itemized include health care |
| those savings but you will have it immediately | | | | expenses, personal property taxes, mortgage |
| available to you in case of an emergency. | | | | interest, state and local taxes you've paid, gifts to |
| If you're using your state taxes as another way | | | | charity, unreimbursed employee expenses and |
| of getting a bigger refund, beware. Many states | | | | many more. |
| are in a financial crunch themselves and are | | | | Third, take advantage of as many credits as you |
| delaying processing of refunds more and more | | | | can. In 2009, there were numerous new credits |
| often. Again, you're better off determining what | | | | available through the Economic Recovery Act that |
| your state tax liability will be and adjusting your | | | | will still be available for the 2010 tax year. And |
| state withholding accordingly. | | | | there are credits that are always available, like the |
| Just be sure you don't reduce your withholding so | | | | Earned Income Credit, Child Tax Credit, and many |
| much that you end up owing taxes at the end of | | | | more. Take the time to seek out these |
| the year. Be as accurate as possible in your | | | | credits. It may take more time to do your |
| calculations and leave yourself a small cushion in | | | | taxes but you'll be getting paid for that time in |
| your withholding. Also, re-evaluate your | | | | terms of a lower tax liability and more money in |
| withholding if your level of income changes during | | | | your pocket. |
| the year. | | | | The bottom line is reducing your tax liability is a |
| Lower Your Tax Liability | | | | better idea than trying to increase your tax |
| The bottom line here is that you should be more | | | | refund. |