“Understanding Tax Refunds: Strategies to Increase Your Return”

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Understanding Tax Refunds

A tax refund is the difference between the amount you paid in taxes throughout the year and what you owe when you file your return. For example, if you had $10,250 withheld from your paychecks in 2022 and owe $8,500 in taxes, you’ll receive a refund of $1,750.

Average Tax Refunds

According to the IRS, the average refund dropped from $3,536 in 2022 to $3,140 for the first half of the 2023 tax filing season, largely due to the end of pandemic tax credits. If your refund is smaller this year, double-check your return for common credits and deductions. Here are six tips to help you lower your tax bill and increase your tax refund.

1. Try Itemizing Your Deductions

Most taxpayers use standard deductions based on their filing status, but you may benefit from itemizing your deductions if you have large expenses like mortgage interest, medical bills, and charity donations. It’s only worth itemizing if your total deductions exceed your standard deduction.

2. Double Check Your Filing Status

Consider your options if you’re single with qualifying dependents or married filing separately or jointly. Head of household filers, who are unmarried with qualifying dependents, get a bigger standard deduction and more generous tax brackets. Married couples may benefit from filing separately if one spouse makes significantly less and qualifies for certain credits.

3. Make a Retirement Contribution

Contributions to a traditional 401(k), 403(b), or IRA are tax-deductible in the year the contribution is made. For the 2022 tax year, you can contribute up to $20,500 to an employer-sponsored retirement plan and up to $6,000 to an IRA, with additional catch-up contributions if you’re 50 or older.

4. Claim Tax Credits

Several tax credits can lower your tax bill dollar for dollar. Common credits for the 2022 tax year include:

• Child Tax Credit: $2,000 per qualifying child under 17.
• Child and Dependent Care Credit: 20% to 35% of care expenses up to $3,000 for one dependent or $6,000 for two or more dependents.
• Earned Income Tax Credit: Helps low- and moderate-income taxpayers with a refundable credit.
• Energy-Efficient Home Improvements: $500 lifetime credit for qualifying upgrades and 30% of qualified expenditures for residential clean energy improvements.
• Electric Vehicle Credit: Check eligibility for tax credits if you purchased a clean energy vehicle in 2022.

5. Contribute to Your Health Savings Account

Contributions to your health savings account (HSA) are tax-deductible. For 2022, individual taxpayers can contribute up to $3,650, and families can contribute up to $7,300, with additional contributions if you’re age 55 or older.

6. Work With a Tax Professional

A qualified tax professional can help you find all available credits and deductions, make decisions about your filing status, and plan for the tax year ahead. Their expertise can be invaluable, especially if you have complex financial situations.

The Bottom Line

One way to increase next year’s refund is to adjust your withholding. By contributing more toward your tax bill with each paycheck, you’ll increase the amount you pay during the year and potentially get a bigger refund. However, most tax experts advise against planning for a large refund, as it essentially means you’re loaning the federal government money for free.

Many taxpayers enjoy getting a refund at tax time as it can feel like a reward. Focus on getting the biggest refund you can: the bigger the refund, the better.

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