Get The Most Back From The IRS

The Early Show financial adviser Ray Martin and Julie Chen
CBS/The Early Show
You may not be looking forward to tax time, but most Americans can look forward to receiving a sizable refund check from the IRS.

Your check may be even bigger this year, thanks to changes in the 2002 tax laws. But, you have to know what to look for, says The Early Show financial adviser Ray Martin.

The average refund so far this year is around $2,300, according to the IRS. That's two percent larger than last year's checks. Martin says the increase may be due in part to taxpayers' earning less on investments this year. And tax brackets have shifted down slightly for the second year in a row.

By taking advantage of some changes in the tax laws, people can further increase their refunds. The really exciting thing about these changes is that you don't have to itemize your return to receive them - anybody can take them (although many do have income requirements).

The entire set of changes act to lower your adjusted income, which means they could set off a chain reaction of savings. In other words, using these deductions to lower your income may make you eligible to receive other deductions or credits and entitle you to an even larger refund.

If you are on the fringe of your tax bracket, taking these deductions could even push you into a lower tax bracket - that's a big bonus. Here is what you need to look for to make the most of this tax season.

Education

If you are going back to school or putting a child through college, you can now deduct $3,000 worth of education expenses.Income must be under: $130,000 for married couples and $65,000 for singles. Assuming you are in the 27 percent tax bracket, Martin says, this will save you $810.

If you paid interest on a student loan, you can deduct $2,500. This deduction used to apply only to the first 60 months of interest payments. Now, however, the interest is deductible for the life of the loan. And income requirements increased this year.

Income must be under $100,000 for couples and $50,000 for singles.
Again, assuming you are in the 27 percent tax bracket, Martin says, this will save you $675.

Note: If your income is too high to be eligible for these deductions, consider letting your child benefit instead. If you don't claim him or her as a deduction on your taxes, the student will file his own return. And, unless he has the most amazing after-school or summer job ever, should qualify for the deduction. This could possibly wipe out all taxes he owes completely.

Finally, a break for teachers. Educators can now deduct $250 worth of out-of-pocket classroom expenses. This can include any supplies purchased for use in the classroom. There are no income requirements or caps.
Assuming you are in the 27 percent tax bracket, Martin says, you can save $68.

Retirement
The amount taxpayers can tuck away into IRA accounts increased this year. Individuals now can contribute $3,000 (a jump from $2,000), and those over age 50 can contribute $3,500.There are no income requirements. Assuming you are in the 27 percent tax bracket, Martin says, contributing $3,000 will save you another $810.

There is a new credit that rewards taxpayers who contribute to any kind of retirement account. You receive 50 percent of your contributions, up to $2,000, as a credit. Of all the deductions we've discussed, this one has the lowest income requirements.

This credit is partially allowed by married filers with incomes below $50,000 and single filers with income below $25,000.

The credit is fully allowed by married filers with incomes below $30,000 and single filers with income below $15,000.

Finally, how many times have you heard people say they're going to use their refund check to take a vacation or buy a new TV or go shopping for spring clothes? While nothing beats the feeling of receiving a big check from the IRS, Martin says that nobody should be receiving this large of a refund. It's fun, but it's not financially wise.

Basically, the IRS has been sitting on this money all year. If it had been in your possession instead, you could have used it to pay off credit card debt or placed it in savings where it was earning interest.

If you receive a large refund this year, be sure to change your withholding amount for 2003.