Tax refunds can feel like Christmas in springtime. With a sudden boost to your bank account, you can look forward to going on a shopping spree, paying down your debt or squirreling the refund away in savings. These days, you can even anticipate when your windfall will arrive by tracking the status of your refund with the Refund Status tool available from the IRS online.
For those receiving minimal refunds, the celebration can be less like real bubbly and more like club soda. But forget the pity party. These taxpayers may be receiving small refunds because they withheld less tax from each paycheck throughout the year. Instead of "loaning" the federal government a bigger chunk of their salary and waiting for April to get it back, they held onto more of their income to spend and invest as they please.
While you can't control the fact that you have to pay taxes, you can control how big of a refund is in your future. So if you rely on your annual tax refund as a way to save for big purchases, or you just love getting a big chunk of cash all at once, we've pulled together 10 tips for getting the biggest refund check possible.
This article has been updated to reflect all new changes to the tax code brought by the Tax Cuts and Jobs Act of 2017.
If you're employed full time at a company, one of the first things you did when you were hired was fill out IRS W-4 tax form. The information you provide on the W-4 determines how much money is withheld from your paycheck each pay period and paid toward your personal income taxes. The calculation is based on the number of exemptions you claim. The more exemptions you claim, the less money is withheld for tax purposes. (Remember that your personal exemption was removed with the 2017 tax law reforms, so the exemptions you're taking will be for other family members.)
If your goal is to increase the dollar amount you receive in your tax refund, you can go to the human resources department and request to change your W-4 tax form. When you reduce the number of exemptions on that form, then a larger amount of money will be withheld from your check each payday. Your tax refund will therefore be larger. The times of year you're allowed make this change are dependent on your company's policies, but generally, it may be made any time of year.
If you need help figuring out how many exemptions you should claim based on the size of your family and your income (including jobs held by a spouse), use the IRS withholding calculator. Keep in mind that the calculator is designed to help taxpayers "break even" by withholding the exact right amount of tax from each payment so they don't owe money in April or receive a big refund check. If you want a bigger refund check, simply subject a few of your qualified exemptions and more tax will be withheld during the year.
Deduct All Donations
If you give generously to charitable organizations throughout the year, you can deduct the value of those donations from your taxable income, which could increase your refund check. Not only can you deduct cash donations to qualified charitable nonprofit organizations (including churches and other religious groups), but you can deduct the cash value of physical donations like clothing, electronics, art or real estate. You can even deduct the mileage used to drive your car as a volunteer for a charitable organization.
To be able to deduct charitable donations, though, you need to itemize your deductions. In the past, around 30 percent of taxpayers chose to itemize their deductions rather than taking the lump-sum standard deduction offered by the IRS, but that number is expected to drop significantly now that the standard deduction has nearly been doubled to $12,000 for individuals and $24,000 for married couples filing jointly [source: Tax Policy Center].
Still, if you make significant charitable donations in a single tax year, it may be worth itemizing. Keep in mind that tax-deductible donations must be made to a nonprofit that can prove its 501(c)(3) tax status. Most legitimate charities state clearly on their websites or in their literature that they're 501(c)(3) nonprofits, so it's usually simple to verify.
Another requirement is that you must keep a receipt. Again, legitimate nonprofits have systems in place to ensure that they'll give you receipts for any and all donations. You also can't technically give all of your money away to charity and expect it to be tax-deductible. In general, you can only deduct up to 50 percent of your adjusted gross income in charitable donations. As with all financial planning and tax decisions, it might be best to see a professional accountant to be sure you don't exceed the maximum.
Review Your Filing Status
Filing status, such as single, head of household, married filing separately or jointly, and others, can greatly influence the amount of money you receive in your refund. This is mostly because each different filing status qualifies for a different standard deduction. Depending on your financial and family situations, you'll want to pick a filing status that minimizes your tax burden and increases your chance of a refund.
In general, married couples should expect a larger tax refund if they file jointly. Filing a joint return qualifies you for that $24,000 standard deduction and can offer some tax breaks unavailable to those filing separately. (If you're married but file separately, the deduction is $12,000 each.)
There are some situations, however, in which a couple may choose to file separately. Andy Lafond, a CPA and accounting professor at Lasalle University, says one reason to file separately is if one spouse earns considerably less and also has a lot of unreimbursed medical expenses. In that case, filing separately allows the lower-earning spouse to deduct more of those medical expenses, because the IRS only allows you to deduct expenses in excess of 7.5 percent of adjusted gross income (10 percent in 2019).
Lafond also sees a lot of taxpayers lose out on tax savings because they file as individuals instead of head of household. Single parents, for example, shouldn't file as individuals if they have one or more children living with them at least six months out of the year. Same with people who are taking care of an elderly parent or relative. If you are financially responsible for that person and they live with you at least half the year, then you qualify as a head of household. Heads of household get an $18,000 standard deduction compared to $12,000 for individuals.
Make Those Kids Count
No one has children just for the tax breaks, but it's a nice perk. In the past, parents could cash in on dependent children in two big ways: the personal exemption and the Child Tax Credit. Unfortunately, the Tax Cuts and Jobs Act of 2017 got rid of the personal exemption, which allowed taxpayers with families to deduct a generous $4,050 each for both parents and another $4,050 each for every dependent child under 19 years old, plus full-time students between 19 and 23 years old.
The good news is that the federal government doubled the value of the Child Tax Credit from $1,000 to $2,000 each for every dependent child 16 years old or younger. The Child Tax Credit is much more valuable than the personal exemption because it's a credit, not a deduction. That means the full dollar value is subtracted from your final tax bill, not just your taxable income. Even better, it's a refundable credit, meaning that if your credits are larger than your tax bill, you get to keep the change.
There is a tradeoff, though. Notice that the personal exemption used to cover older kids, including those in college. While it's true that the Child Tax Credit is only good up to 16 years old, the tax reform bill introduced a new $500 tax credit for children up to 23 years old who are full-time students as well as $500 each for other "qualifying relatives" who live in the household, including elderly parents [source: Perlman].
Deduct Dependent Care Expenses
Taking care of kids or aging parents can rack up huge expenses. Did you know that some of those expenses are deductible? If you pay someone to take care of your kids or an elderly relative while you're at work, you can reduce your tax liability and increase your refund through the Child and Dependent Care Credit.
The Child and Dependent Care Credit is important, because like the Child Tax Credit, it is subtracted from your final tax bill dollar for dollar, not deducted from your taxable income. The trick is figuring out if you qualify for this credit and how much it's worth. To qualify for the credit, you must pay for someone to take care of your dependent child (younger than 13) so that you can work (or look for work). You also can claim this credit if the child is older than 13 and mentally or physically impaired (adults who fall in these categories can be claimed also.)
There's a limit of how much of those child or dependent care expenses you can claim. The IRS says that you can claim up to $3,000 in expenses for one qualifying individual or $6,000 for two or more individuals. The actual amount of the credit is only a percentage of those costs, between 20 and 35 percent based on your annual income [source: IRS]. So if you claim the maximum of $6,000 to send two kids to daycare and you make $35,000 a year, you'll get a credit worth $1,440 (24 percent of $6,000).
Increase IRA Contributions
One of the most recommended ways to increase your tax refund is to increase your contributions to your retirement fund. Contributing to an Individual Retirement Account (IRA) or 401(k) not only facilitates saving for retirement, but placing money into the IRA lowers the total taxable income because it comes off the top. The more you contribute to the IRA, the less of your income is subject to taxes. Generally, the lower your taxable income, the less you'll owe in taxes, and the less you owe in taxes, the greater the refund.
Be careful, though, to make the IRA contribution by the deadline, and know your limits. For the 2018 tax year, you can deduct a maximum of $5,500 ($6,500 if you are 50 or older) in IRA contributions from your taxable income. That limit increases to $6,000 ($7,000 if you are 50 or older) in 2019 [source: IRS]. Consult a tax professional to ensure your IRA contributions are made on time and in the right dollar amount.
Refinance Your Home
When interest rates are low, many homeowners look at refinancing their homes. Those who refinance at a lower interest rate benefit from lower mortgage payments as well as a lower amount paid over the life of the mortgage. But did you know refinancing could also bump up your tax return?
When you refinance your home, the majority of your initial monthly payments will be going toward interest on the loan. While it's no fun paying a big chunk of money in interest, all of that interest is tax deductible. The new tax law allows homeowners to deduct the full amount of interest on mortgage loans (including refinanced loans) up to $375,000 for individual filers and $750,000 for married couples filing jointly [source: IRS].
Of course, a lot of factors need to be considered when refinancing a home, including your new interest rate, how much you still owe on your house and its current market value.
Another option to remember is a home equity loan. The new tax law allows you to deduct the interest on a home equity loan as long as the money is being used to improve the house [source: IRS]. In the past, you could deduct interest paid on a home equity loan no matter what you planned to do with the money, but it's still a tax-wise way to cash in on the equity in your house.
It Still Pays to Go Green
If you've been thinking about adding solar panels to your house or buying an electric vehicle, it could do wonders for your tax refund. The 2017 tax reforms put some new limits on green tax credits, but most of the tax breaks are still in effect through 2025.
The Residential Renewable Energy Tax Credit, for example, allows you to claim a tax credit up to 30 percent of the total cost of a home renewable energy project that's up and running by the end of 2019. Qualifying upgrades include installing solar panels or a solar water heater, small wind turbines or even geothermal heat pumps. After 2019, the value of the tax break starts to go down [source: TurboTax].
The same is true if you buy a plug-in electric vehicle like a Nissan Leaf or a Chevrolet Bolt. For most of these cars, the IRS will give you a tax credit of up to $7,500. For more popular vehicles like the Tesla models and the Toyota Prius Prime, the credit is less, but it's still worth snapping up the tax breaks while they last [source: Edmunds].
Both the renewable energy credit and the electric vehicle credits are nonrefundable credits, meaning that they are subtracted dollar-for-dollar from your tax bill, but they won't result in a tax refund by themselves. That said, these green credits combined with other refundable tax credits can significantly boost your refund.
Work for Yourself
For many Americans, business ownership has become a path to financial freedom. Home-based business owners can deduct things like a home office, telephone, internet service and office supplies. When you start a business, the initial deductions may offer tax refunds, and as the business begins to make money, the continuing deductions lower your taxable income. Thanks to the latest tax reforms, starting your own business makes even more financial sense. Not only can you deduct normal business expenses like the equipment you use for your business, and portions of the facilities and utilities, but you can also claim an automatic 20 percent deduction on all business income. Yup, if you are a sole proprietorship, a partnership or even an S corporation, you can claim this whopper of a deduction starting in the 2018 tax year [source: IRS].
There are some limits and exclusions to this 20-percent deduction (this is the IRS, of course). Your business can't make more than $157,500 for individual filers or $315,000 if married and filing jointly. And certain professions can't claim it, including doctors, lawyers and accountants [source: Mercado].
Just make sure you can prove to the IRS that you really have a business and are not just trying to write off expenses. If your side business never shows a profit even after several years, the IRS might flag you for an audit.
Invest in Tax Planning
Tax planning is one of the best ways to take advantage of all these deductions and get the maximum tax refund possible. Tax planning often starts at the very beginning of the year and takes into account how much money you'll earn and how different expenses (or extra income) affect the total tax amount that you'll owe. Planning also helps you evaluate different ways of using your money to buy needed, yet tax-deductible items or make other tax-reducing investments.
A tax-planning professional (or you, if you're your own best accountant) can play with the numbers in computer software to evaluate what changes you can make to lower the tax bill, therefore upping the refund.
For more tax tips, check out the links on the next page.
Last editorial update on Apr 2, 2019 03:49:14 pm.
Many Americans don't think about their tax bills until the new year. But there are things you need to do before Dec. 31 if you want to pay less later.
- Edmunds. "Electric Vehicle Tax Credits: What You Need to Know." Jan. 29, 2019 (April 1, 2019) https://www.edmunds.com/fuel-economy/the-ins-and-outs-of-electric-vehicle-tax-credits.html
- IRS. "Interest on Home Equity Loans Often Still Deductible Under New Law." Feb. 21, 2018 (April 2, 2019) https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
- IRS. "Publication 503 (2018), Child and Dependent Care Expenses" (April 1, 2019) https://www.irs.gov/publications/p503
- IRS. "Qualified Business Income Deduction" (April 1, 2019) https://www.irs.gov/newsroom/qualified-business-income-deduction
- IRS. "Retirement Topics: IRA Contribution Limits" (April 1, 2019) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
- Mercado, Darla. "Small-business owners look to grab this 20-percent tax break." CNBC. Feb. 4, 2019 (April 1, 2019) https://www.cnbc.com/2019/02/04/got-a-small-business-see-if-you-can-grab-this-20-percent-tax-break.html
- Perlman, Jackie. "The Credit for Other Dependents (Formerly Family Tax Credit)." H&R Block. Nov. 8, 2018 (April 1, 2019) https://www.hrblock.com/tax-center/irs/tax-reform/family-tax-credit-other-dependents/
- Tax Policy Center. "What are itemized deductions and who claims them?" Tax Policy Center Briefing Book: Key Elements of the U.S. Tax System (April 1, 2019) https://www.taxpolicycenter.org/briefing-book/what-are-itemized-deductions-and-who-claims-them
- TurboTax. "Energy Tax Credit: Which Home Improvements Qualify?" (April 1, 2019) https://turbotax.intuit.com/tax-tips/home-ownership/energy-tax-credit-which-home-improvements-qualify/L5rZH56ex