Whether your income comes from monthly salary or personal earnings, having your money reduced due to taxes is an unpleasant feeling. Nobody likes to have their income slashed, which is why some people look forward to getting a big tax refund.
According to the Internal Revenue Service (IRS), the average tax refund amount for the 2021 tax filing season (2020 tax year) saw an 11.2% jump compared to the year before, amounting to an average refund of $2,775.
While the tax refund for 2021 is already high, you can still utilize strategies to get a larger sum. Here are ways to take advantage of every possible tax break and minimize your tax liability.
1. Check and update your filing status
When filing for your tax return as a U.S. expat, you need to choose a filing status. Whether you’re single or married, this decision will affect the size of your refund. If you’re married, it may be best that you file jointly with your spouse, but you should also consider filing separately.
For example, if you or your spouse have many business or medical expenses, you should consider filing separately to reduce your adjusted gross income and boost your deductions. However, filing separately also means missing out on major tax credits.
To know which filing status will yield better benefits, you and your partner should run the numbers for both options. If either of you finds it challenging, you can seek the help of tax preparation services to estimate your returns easily.
2. Consider all tax deductions and credits applicable to you
Tax credits reduce the amount of taxes you owe the IRS dollar-for-dollar. With refunds, you usually get bigger tax returns with credits than deductions.
Your eligibility for credits will depend on your income, filing status, and other specific requirements. Some examples of credits you can file for are educational credits like The American Opportunity Credit and Lifetime Learning Credit, Earned Income Tax Credit (EITC), and Child and Dependent Care Credit.
For the 2022 tax filing season (2021 tax year), the American Rescue Plan didn’t only lower health insurance premiums but also caused changes in tax payments like the expansion of the childless EITC. This is a fully-refundable credit for low-moderate income households. For this tax year only, if you’re filing for this credit, the maximum EITC is $1,502.
While you can get more with credits, it doesn’t mean you should ignore deductions. Tax deductions reduce the amount of your income that is subject to tax.
To avoid making an expat tax mistake, you should check if you qualify for deductions. Itemizing your deductions allows you to knock off a lot of deductible expenses like the Foreign Earned Income Exclusion (FEIE), charitable contributions, student loan interests, and home office expenses for the self-employed.
3. Think of the relatives you support, if you have any
This tax season, the child and dependent care credit and child tax credit are significantly larger than the previous years. Made possible by the American Rescue Plan, the child tax credit is raised to $3,000 per child or $3,600 per child under six years old, from $2,000 in 2020.
The child and dependent care credit is also higher for this tax year, with $8,000 for one qualifying individual and $16,000 for two or more. It covers children under 13 years old and individuals who are mentally or physically incapable of self-care. So, if you have qualified friends or relatives, it would be a huge deal if you claimed them as dependents.
Alternatively, you can also qualify for the head of household status if you’re single. This status can increase your refund as it gets a larger standard deduction than single filers. To be eligible for the head of household status, you should have paid for more than half of the household maintenance costs for yourself and a dependent over the past year. A qualifying dependent includes an aging parent or a child.
4. Pay your IRA contributions
The 2021 calendar year may be over, but that doesn’t mean that your contributions in 2022 won’t count for the tax year. You can still fund your IRA until the filing deadline in June (for expats).
By paying your IRA contributions, you may have them partially or fully deductible even if you’re not itemizing your deductions. Additionally, whether you’re paying for traditional or Roth IRA, you may also claim Saver’s Credit.
Get More Money Back Into Your Pocket
Filing taxes may be complicated for expats, but it shouldn’t stop you from going the extra mile to receive a tax refund. You may follow the tips above to reduce your tax liability and get more money back into your pocket.
If you need any assistance maximizing your tax return, don’t hesitate to consult with a tax resolution partner. Tax Samaritan has provided the best-in-class service for expat tax since 1997. We can help you resolve your tax problems and get you the biggest possible refund this year.