Nobody enjoys filing their tax return but the prospect of a big refund can surely make it worthwhile. However, the general public is largely unaware of various ways that can help them maximize the money they get back on taxes.
A tax refund or return is the difference between the amount you paid in taxes throughout the year and what you owe when you file your tax returns. For instance, if you withhold $10,000 from your paycheck in a year and end up owing $7,000 in taxes, you will get back $3000 as a refund.
With the tax filing deadline approaching on April 15, 2024, it is best to learn how to get more tax refunds. However, recent tax changes, including the expiration of several pandemic-related tax benefits can eat up your tax return.
However, that doesn’t mean that you can not find ways to increase your tax refund. With a thorough tax filing approach and strategic planning, you can minimize your tax liabilities and maximize the money you get back on taxes.
Let’s get started.
How to Maximize Tax Returns? 6 Simple Strategies
Here are some surefire strategies that can help you get a bigger tax return in 2024.
A. Choose the Best Filing Status
Your filing status determines the standard deduction amount as well as the income thresholds used for some deductions and credits. Choosing the best filing status is the first step to maximizing your tax returns. There are five options available-
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
The filing status you choose can significantly alter your tax returns. For instance, a person can file as a qualifying widow(er) for the two years after the death of their spouse. This filing status nearly doubles the standard deductions someone would get if they filed as single.
You might not always have the option to change your filing status. A single person can not file as married, but, maybe you can qualify to file as head of household in which case you can avail of a larger standard deduction, among other benefits.
On the other hand, married couples should always file as married, filing jointly. Experts suggest that you are better off filing as married 99% of the time. However, some rare instances like if one spouse has a medical condition and would like to itemize the medical expenses. In this case, a couple’s combined income might make itemization difficult.
B. Itemize Your Deductions
The Tax Cuts and Jobs Act of 2017 significantly increased the standard deductions to the point where most people don’t itemize their deductions. However, itemizing can be a useful tool if you are wondering “how to get a bigger tax refund?”
Although most taxpayers generally use standard deductions based on their filing status, perhaps you can benefit more and reduce your tax liability if you are able to itemize your deductions.
If you have large expenses like mortgage interest bills, medical bills, or charity donations, you can itemize your deductions. However, keep in mind, that it is only worth itemizing if your total deductions add up to be more than what your standard deductions would be.
If you don’t have enough expenses to itemize, experts suggest that you should batch them. For instance, rather than making small yearly donations, make a larger one every few years.
C. Contribute to a Traditional IRA
If you are wondering “how to get a bigger tax refund?”, maximizing your contributions to a traditional IRA will help you reduce your tax liabilities and save up for retirement simultaneously. Even experts believe that retirement funds are one of the best options for people to maximize their tax returns.
The more you save in these accounts, the more you save on your tax returns. However, make sure to contribute to a traditional IRA and not a Roth IRA. Roth IRAs are funded by after-tax dollars and the contributions are not tax-exempted.
If you have an employer-provided 401(k), the ability to deduct IRA contributions begins to diminish for single and head-of-household filers if their modified gross income reaches $68,000.
Note that the actual savings actually depend on your tax rate, as these contributions count as deductions, not tax credits. However, if you are below a certain income threshold, you can qualify for the Retirement Savings Contributions Credit.
D. Contribute to a Healthcare Plan
One of the best ways to save income taxes while also saving for healthcare expenses is to contribute to a healthcare savings account. If you have a qualifying high-deductible healthcare insurance plan, you can save a lot on your taxes.
These accounts allow individuals to save money for medical expenses and come with triple-tax savings. Contributions made to healthcare savings accounts are deductible, the earnings are tax-free, and withdrawals are tax-exempted if used for qualifying expenses.
Similarly, if your employer offers a flexible spending account, you could set aside pre-tax money to pay for eligible medical expenses. However, FSA funds typically have limited year-to-year rollover capabilities.
If you want to learn how to maximize tax returns, these types of accounts can reduce your taxable income which in turn increases your tax returns.
E. Utilise Tax Credits
Tax credits that were available during the pandemic may have expired but there are still many credits that lower your tax bills dollar for dollar. Even if you don’t itemize your deductions, you should take advantage of tax credits that you qualify for. Doing so can significantly reduce your tax liability and in turn, increase your tax returns.
However, many tax credits are non-refundable. This means that if your tax credit reduces your tax liability below zero, you will not receive a tax refund, but you can at least avoid tax debt.
Tax credits are quite dynamic and typically change every year. Make sure to check regularly to see if there are any you qualify for. For instance, taxpayers can take advantage of environment-related credits from the Inflation Reduction Act.
The Earned Income Tax Credit allows qualified taxpayers to claim up to $6,935 for three or more qualifying children in tax year 2022. In 2023, this will go up to $7,430.
F. Consult With a Tax Professional
If you have been using the same tax accountant for years and want to get a bigger tax refund, it might be time to have a new tax professional look over your tax bills. After a few years, most tax accountants are accustomed to completing a client’s tax returns in a certain way and don’t actively look for better options and savings. This is the harsh reality.
A new accountant or financial advisor may provide a more robust and beneficial approach to an individual’s tax situation and may be able to procure larger tax returns.
If you file your tax returns yourself or use a tax professional, the tax code is always changing and it is crucial to remember that the opportunities for savings may change as well every year.
These are some of the best strategies to minimize your tax liabilities and increase your tax returns simultaneously. However, since the tax code is constantly changing, there will be many other ways to boost your tax returns in the years to come.
That being said, don’t over-fixate on tax credits, deductions, and increasing your tax refund. For instance, it might not be a great idea to buy something you can’t afford just to get a tax break.
You should opt for strategies that can help you save on taxes while also helping yourself in other areas of life, like contributing to an HSA to save healthcare costs or contributing to a traditional IRA to save for retirement. Lastly, make sure to consult with an accountant or financial advisor to find the right path for your current financial situation.
Frequently Asked Questions(FAQs)
Ans. According to the IRS, the average tax refund for the 2023 season(tax year 2022) was $2753. The average direct deposit tax refund was slightly higher at $2827.
Ans. There are many ways to reduce your tax liabilities and maximize your tax returns. For example- you can take advantage of tax credits, contribute to a traditional IRA, or contribute to an HSA to get a tax break.
Ans. There are certain expenses that can be filed as deductions when filing your tax returns. Some of the most popular ones include-
Student Loan Interest
HSA contributions, and more.