With tax season upon us, there’s at least one thing to look forward to—your tax return. Whether you plan on putting your return in your savings account or you have some big purchases to make, you’ll probably want your maximum tax refund.
Looking to maximize your tax return this year? We’ve got some tips and tricks you can use to get your maximum tax refund this year. Of course, this is just general information. Remember to consult a tax professional to look at your specific tax situation.
In This Piece:
- Do Tax Deductions Really Increase Your Refund?
- How Do Tax Credits Work?
- Is There a Limit on Tax Refund Amount?
- 6 Tips for Your Maximum Tax Refund
- Get Your Maximum Tax Refund as Fast as Possible
Do Tax Deductions Really Increase Your Refund?
A tax deduction doesn’t provide a dollar-for-dollar reduction of your income tax liability. A tax deduction lowers your taxable income, which means you’re paying less in taxes overall. It can also increase your refund, but this depends on how big the deduction is, what kind it is, your income and your filing status. It’s also important to make sure you’re only taking deductions you’re eligible for.
How Do Tax Credits Work?
A tax credit gives you a dollar-for-dollar reduction in the amount of tax you owe. So, if you receive a $1,000 tax credit, you pay $1,000 less in taxes.
Is There a Limit on Tax Refund Amount?
There’s no limit on the amount your tax refund can be. However, in some cases, high-value tax refunds may be sent as a paper check instead of a direct deposit. The IRS doesn’t publish the threshold for when a check is issued instead of a direct deposit, but it does limit direct deposits to three deposits per account.
6 Tips for Your Maximum Tax Refund
While there are very specific laws and regulations regarding taxes and how your refund is calculated, there are some ways to potentially get a bigger refund. Check out these six tips to maximize your refund.
1. Know Available Deductions and Your Exemptions
An exemption is money you earn but don’t have to pay taxes on. A deduction lowers the amount of your income you have to pay taxes on by lowering your taxable income.
There are two main types of tax deductions—the standard deduction and itemized deductions. Taxpayers must use one or the other, and the IRS notes it’s generally best to itemize deductions if your total itemized deductions are greater than the standard deduction.
Both exemptions and deductions reduce the amount of money you owe the IRS each year and can help you score a bigger refund—or at least a lower bill. That’s why it’s important to know which deductions you’re eligible for if you itemize. We cover a few common ones below. To learn more, see our guide to common tax deductions and exemptions.
New for 2021
The IRS raised the standard deductions for the 2021 tax year. The new numbers are:
- Married couples filing jointly: $25,100
- Singles and married couples filing separately: $12,550
- Heads of households: $18,800
The Earned Income Credit was also raised to $6,728 for filers who have at least three qualifying children.
Additionally, the Child Tax Credit was raised to $3,000 per child, but $250 per month per child was paid out in advance starting in July 2020. If you didn’t opt out of receiving your tax credit early, you could see less of a refund than you’re used to at the end of the year.
2. Build Your Retirement Savings
Contributing to a 401(k) plan offered by your employer is a great way to shield income from taxes and build up savings for the future. Contributions are taken before you pay taxes. You don’t pay taxes on that money, and it comes out of and reduces your taxable income. Making contributions to an individual retirement account (IRA) works, too. You can’t usually use pre-tax dollars for an IRA, but you can deduct your contributions from your taxes.
In 2021, the IRS raised the limits on the contribution employees can make to their retirement accounts, including 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plans, to $19,500. You can also continue to count any contributions you make to a traditional IRA until April 15, 2022, and those contributions apply to your 2021 tax bill.
3. Pay for Medical Expenses With a Flexible Spending Account (FSA)
A flexible spending account (FSA) lets you set aside part of your salary on a pre-tax basis for medical expenses and child and dependent care. Many employers offer FSAs, which can be a valuable tool for lowering your tax bill by holding money you use to pay for medical and childcare expenses from your taxable income.
4. Deduct Medical and Dental Costs
If you itemize deductions, you can take a tax deduction for all the medical bills you’ve paid in the previous year over 7.5% of your adjusted gross income. Medical expenses include health insurance premiums if paid with post-tax money, dental care, eye care and glasses, mental health counseling and driving to and from doctor visits and other medical appointments.
For the 2021 tax year, qualified medical expenses that exceed 7.5% of your adjusted gross income (AGI) for the year qualify for a deduction. However, the amount of unreimbursed medical expenses must exceed 10% of the adjusted gross income to qualify. There are specific rules for medical deductions, so make sure you know what you can deduct.
5. Make Charitable Donations
Clean out the closets, donate an old car instead of trading it in or make financial contributions to your favorite charities if you itemize. Charitable contributions can trim your tax liability and may boost the amount of any tax refund coming your way. Make sure you give your donations to a qualified charity and keep good records. You’ll need to itemize your charitable donations on a 1040 tax return using Schedule A.
6. Consult a Tax Professional
If your tax returns are complicated and you suspect you’re leaving money on the table, it may be time to get help. A professional tax service can help you get your taxes done efficiently for a potentially faster refund, and it can ensure you’re doing everything you can to get the biggest refund.
Get Your Maximum Tax Refund as Fast as Possible
You have the option to file yourself for free or use a tax preparer, but which you choose can impact when you get your refund. Most tax refunds are processed and in your pocket in three weeks. However, some preparers offer an interest-free loan, known as a refund advance, when you use their tax preparation services. With these services, you can have your money—or part of it—in hand the next day.