Most people don’t want to pay more taxes than what the government requires. Having to unnecessarily hand over more money to the IRS or your state’s tax department makes it harder to achieve your financial goals. If you count on your annual tax refund to pay off debt or cover another significant expense, maximizing your tax credits and deductions will help to increase your payout. Figuring out how to get a bigger tax refund can be easy when you follow these suggestions.
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How To Calculate Your Tax Refund
Here is a quick refresher of some of the factors that can determine whether you get a tax refund or owe a tax liability:
- Filing status: Single; Head of Household; Married, Filing Jointly; Married, Filing Separately.
- W-4 Tax Allowances: Not withholding enough during the year may require you to owe a liability. A higher withholding reduces your take-home pay but you’re more likely to get an end-of-year tax refund as you pay too much tax during the year.
- Tax deductions: These items reduce your taxable income and finalize your adjusted gross income (AGI).
- Tax credits: Minimize the amount of tax you owe but do not reduce your income subject to taxation.
Here is the difference between a tax credit and a tax deduction.
Check Your Filing Status
Did you know? You can adjust your tax allowances to withhold more or less of your paycheck for income tax. Your tax filing status can also impact your potential refund amount. Most people either file Single or Married, Filing Jointly. If you’re married or have dependents, an alternative filing status can be more beneficial under special circumstances.
Married couples can use the “Married, Filing Separately” instead of the default “Married, Filing Jointly.” Filing separately can allow one spouse to itemize their tax deductions with the standard deduction ($27,700 in the tax year 2023 for individuals), but you won’t qualify for as many tax credits and deductions. Here are some of the deductions you may miss out on:
- Earned income tax credit
- Student loan interest deduction
- Child and dependent care expenses
- Adoption credit
You may also consider claiming “Head of Household” instead of single to be eligible for more tax benefits potentially. Your tax advisor can help you decide if switching your tax status is advantageous.
Claim Above-the-Line Tax Deductions
Above-the-line tax deductions are one of the easiest ways to increase your tax refund amount as you don’t have to file an itemized return. In addition to automatically qualifying for the standard deduction, you might be eligible for these deductions:
- Student loan interest deduction: Up to $2,500 in paid student loan interest
- Educator expenses: Teachers can deduct $250 ($500 for joint tax returns.)
- Self-employed business expenses: You might be able to deduct business-related expenses if you have a side hustle or earn self-employment income.
- Alimony: Only alimony payments from 2018 or earlier are tax-deductible.
- Medical insurance premiums: Most employers let you pay the employee portion of health insurance with pre-tax income. You can deduct your premium if you pay with after-tax dollars if you’re self-employed or have an exchange-provided plan.
- Tax-advantaged accounts: Contributing to tax-advantaged investment and health savings accounts can reduce your taxable income. However, you may need to pay income taxes
- Investment losses and expenses: You can report realized investment losses to offset your capital gains. In addition, if you own investment properties, you can deduct property taxes and ongoing expenses to reduce your taxable income.
- Online tax software will help you find which deductions you’re eligible for with an extensive tax interview.
You can also see which pre-tax deductions your employer offers for employee benefits. These benefits can include:
- Health insurance
- Group-term life insurance
- Commuting expenses
- Retirement plans
With these deductions, your employer deducts the amount from your gross income and reduces your taxable income. Then, you pay taxes on the remaining amount of your paycheck.
File an Itemized Return
Below-the-line deductions are only available if you can file an itemized return. Some of the itemizable deductions include:
- Home mortgage interest
- Charitable contributions
- Medical expenses
- State and local taxes (SALT)
- Property losses from a federally declared disaster
The deduction limits are different for each one. For example, you may only deduct up to $10,000 in state and local taxes ($5,000 for single filers). In addition, qualifying medical expenses must exceed 7.5% of your modified adjusted gross income. Your combined balance in itemized deductions must exceed the standard deduction for your filing status to apply these deductions.
The deduction amount for each filing status is the following in 2023:
- Single or Married, Filing Separately: $13,850
- Married, Filing Jointly: $27,700
- Head of Household: $20,800
These deduction minimums are high, and most taxpayers will claim the standard deduction instead.
Claim Tax Credits
Tax credits can also boost your refund amount by reducing your tax liability dollar-for-dollar. However, you will need to distinguish between refundable and non-refundable credits:
- Non-refundable tax credits: These credits reduce your income tax down to $0. Unfortunately, you don’t receive any excess credit as a refund but might be able to carry over some of the remaining balance to next year’s taxes.
- Refundable tax credits: You receive any remaining balance as a tax refund in addition to canceling out your tax liability.
There are several ways to qualify for a tax credit. Some are based on your earned income or the number of dependents. Other credits can partially reimburse some of your spending for education or energy-efficient home improvements like installing solar panels. Here are some of the most popular tax credits to keep an eye on:
- Child Tax Credit (CTC): Up to $2,000 per child in 2023 (up to $1,400 is refundable).
- Earned Income Tax Credit (EITC): Funds for low and moderate-income families
- Child and Dependent Care: Up to $3,733 for one child or $6,,164 with two or more children.
- Adoption: Up to $15,950 in eligible adoption-related expenses per child.
- American Opportunity Tax Credit: Parents or students can receive up to $2,500 for qualifying tuition and expenses
- Lifetime Learning Credit: Up to $2,000 for tuition and other expenses.
- Premium Tax Credit: Income-based tax credit that reduces your annual health insurance premiums for marketplace plans.
- Solar Tax Credit: Up to 20% for home solar systems installed in 2023.
- Saver’s Credit: Up to $1,000 for singles ($2,000 if filing jointly) when contributing to a tax-advantaged retirement plan. However, your annual income must be relatively low as it completely phases out at $36,500 for singles and $73,000 for couples in 2023.
It can be easy to overlook some of these credits. However, if you qualify, tax credits can be more beneficial than tax deductions, especially if it’s a refundable credit.
Contribute to Retirement Accounts
Traditional retirement plan contributions are another easy way to reduce your taxable income, and the contribution grows tax-deferred. But you will pay income taxes on the withdrawal amount in the future. Here are the annual contribution limits for 2023:
- IRA: $6,500 ($7,500 if you’re age 50 or older)
- 401k: $22,500 ($30,000 if you’re age 50 or older)
The contribution limit applies to your combined contributions for traditional and Roth accounts. So, for instance, if you contribute $6,500 to a traditional IRA, you cannot add to your Roth for that tax year. Also, the annual contribution limit is for each taxpayer.
If you’re married, you and your spouse can each contribute $6,500 into your IRA and $22,500 into an employer-provided plan to max out your retirement savings. As a result, retirement account contributions can be one of the easiest ways to get a bigger tax refund with no dependents.
The IRA funding deadline is the same as the federal income tax deadline (usually on or around April 15th) if you’re looking for a last-minute tax deduction.
Our 401k vs. IRA comparison can help you decide which retirement plan option is better.
Finally, when you make contributions to these accounts, make sure to read up on the Retirement Savings Contribution Credit because it can put even more money in your pocket. Based on your adjusted gross income, you could get a sizable credit.
Health Savings Accounts
Contributions to a tax-advantaged medical savings account can also help you get a bigger tax refund. If you have an eligible high deductible health plan (HDHP), your best option can be a health savings account (HSA). Your contributions are tax-deductible and most likely tax-free for most medical costs. Here are the annual contribution limits for 2023:
- Individuals: $3,850 (+$1,000 if age 55 or older)
- Families: $7,750 (+$1,000 if age 55 or older)
If you don’t qualify for an HSA, your employer may offer other tax-advantaged savings accounts that you can fund with pre-tax income contributions:
- Flexible spending arrangements (FSAs)
- Health reimbursement accounts (HRAs)
- Medical savings accounts (MSAs)
Now that you know how to get a bigger tax refund, you may want to use some or all of the tactics I’ve covered in this article to improve your tax situation. Keep in mind, it’s never a bad idea to consult with a tax professional who can help you maximize any eligible tax deductions and credits.