Contributed by: Tricia D, FreeTaxUSA Agent
For the Americans who receive a tax refund, the opportunity to increase your refund from the IRS may be of interest. Alternatively, you might want to know strategies to prevent owing taxes when the year ends.
A tax refund is not a windfall, but rather a combination of a return of your own money you overpaid in taxes throughout the year and tax credits you qualify for and claim. Your tax refund is based on the taxes you paid, the taxes you owe, and tax credits applied to your return. Therefore, the best way to get a bigger refund is to reduce your tax liability and maximize your tax savings and credits.
Tips to help you get a bigger tax refund next year
You can take the standard deduction or itemized deduction on your tax return. Either deduction lowers your taxable income, thus reducing your total tax and increasing your refund. Generally, you’ll choose whichever deduction is larger.
- The standard deduction is a set deduction amount by the IRS that is subtracted from your adjusted gross income if you are not itemizing. For the latest standard deduction amounts according to your filing status go to IRS Publication 17.
- Itemized deductions include expenses like mortgage interest, charitable contributions, medical costs, state income or sales taxes, local real estate taxes, investment interest, and more. Taxpayers may opt for itemized deductions if their total is more than the standard deduction.
- Deductions and credits can lower how much income is taxable, reduce total tax, and increase tax payments. Each deduction and credit have specific eligibility requirements that must be met. Examples of deductions and credits are as follows:
- Child tax credit
- Earned income tax credit
- Education credits
- Saver's credit
A Complete list of deductions and credits, as well as qualification requirements can be found here: Credits and deductions for individuals | Internal Revenue Service (irs.gov)
- Contribute more to your retirement accounts. Contributions to a traditional IRA or a 401(k) plan allow you to postpone taxes on both the money you put in and its earnings until you take the funds out during your retirement. This is done by contributing money to a retirement account, which is an income reducing adjustment, lowering your taxable income.
- Modify your tax withholding. Increased income may raise the tax and place you in a higher tax bracket. If you have decreased your tax withholding, received a salary increase, or started an additional job, it is possible you have withheld less tax during the year. This will result in a smaller refund when you file your taxes.
- If you want to get a bigger refund, increase the amount of tax withheld from your paychecks by updating your Form W-4 with your employer. This results in less take-home pay, but more money refunded at tax time. However, it is not the most cash-efficient method since you are loaning money to the government without interest. A better strategy is to withhold the right amount of tax to avoid penalties and use the extra money to pay off debt, invest, or save.
- The IRS Tax Withholding Estimator is a tool you can use to find the proper amount of tax to be withheld from your earnings, considering your income and deductions.
- Plan your purchases. If you are planning improvements to your home or plan to purchase a new car, consider energy efficient purchases that will qualify you for a tax credit. Congress has passed and will likely continue passing laws to incentivize taxpayers to make purchases of energy efficient home improvements and vehicles. These purchases may qualify you for tax credits which can reduce your taxes and increase your tax refund.
Take-Away
Remember a tax refund is not a bonus, but a refund of your own money, including any tax credits you qualify for. Therefore, you should aim to pay the right amount of tax throughout the year and use your money wisely. FreeTaxUSA can help you file your taxes easily and accurately to get the maximum refund you deserve.
