What Can Give You a Higher Tax Refund?
The only way to calculate a refund on your income tax return is if you pay income tax during the year or are eligible to claim a refundable tax credit. There are many strategies you can implement that will give you a higher tax refund. These include claiming deductions to reduce your taxable income, increasing the withholding or estimated payments you make during the year and even by choosing certain investments over others.
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Maximizing Tax Deductions
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A strategy you can implement each tax year is maximizing your deductions by thoroughly evaluating every possible expense you can include, regardless of how small the tax savings. The first category of deductions are adjustments to income that directly reduce your gross income, which results in your adjusted gross income (AGI), such as deductions for tuition, student loan interest and alimony payments. When you prepare your tax return, you should carefully evaluate which expenses you can deduct since the federal government frequently changes the types of expenses you can deduct each tax year.
In addition, you’re eligible to claim the standard itemized deduction or your itemized deductions, whichever is larger. As a result, your annual tax preparation should include evaluating whether the total of your expenses eligible to be itemized is greater than the standard deduction. The more tax deductions you reduce your taxable income with, the higher your tax refund will be.
Increasing Withholding
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Every tax return form calculates your refund as the difference between the tax you calculate on your taxable income and the withholding and estimated tax payments you make during the year. Therefore, increasing your payments during the year will increase the refund you will receive from the IRS. If you prefer to receive a large refund, you can reduce the allowances you claim on your W-4 to increase the amount your employer withholds from your paychecks. If you are self-employed, increasing the amount of your estimated tax payments yields the same result.
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Claiming Tax Credits
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There is a wide range of tax credits you can claim that reduce the amount of tax you owe on a dollar-for-dollar basis rather than reduce your taxable income. Some of the tax credits you can claim include the lifetime learning credit for tuition payments and the expenses you incur to adopt a child. However, there are also refundable tax credits, such as the American opportunity credit, that allow you to include part of the credit in your tax payments rather than as a reduction in your tax bill. This is beneficial when the total of your tax payments and refundable credits exceed the tax liability you calculate on the return. In this case, the IRS will provide you with a refund despite not paying the tax.
Tax-Exempt Investments
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Most of your investment income, such as gains on the sale of stock, dividend payments and interest earnings from financial accounts, are taxable. However, to reduce the amount of taxable income you report and increase your refund, you can invest in state municipal bonds since the interest you earn on these investments is tax-exempt.
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