How to Get a Big Tax Refund: Credits, Deductions, and Withholding

A tax refund represents an overpayment of taxes throughout the year. This occurs when the total amount of tax withheld from your paychecks or paid through estimated taxes exceeds your actual tax liability. Understanding the mechanisms that influence this balance can help you navigate your financial planning.

Leveraging Tax Credits

Tax credits are valuable because they directly reduce the amount of tax you owe, dollar for dollar. Unlike deductions, which lower your taxable income, credits directly cut your tax bill. This direct reduction can significantly increase your tax refund, potentially leading to a refund larger than the amount of tax you paid.

Tax credits are categorized as either refundable or non-refundable. A non-refundable tax credit can reduce your tax liability to zero, but it cannot generate a refund if the credit amount exceeds your tax owed. Any unused portion of a non-refundable credit is lost. In contrast, a refundable tax credit can reduce your tax liability below zero, meaning any excess credit amount is paid out as a refund.

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is a refundable credit designed for low-to-moderate income working individuals and families. For 2024, eligibility for the EITC varies based on income level and the number of qualifying children. This credit can provide a substantial refund, even if no tax was withheld.

Child Tax Credit (CTC)

The Child Tax Credit (CTC) is another significant credit that can increase a refund, providing up to $2,000 per qualifying child for 2024. To qualify, a child must be under age 17 at the end of the tax year, have a Social Security number, and be claimed as a dependent. A portion of the CTC, known as the Additional Child Tax Credit (ACTC), is refundable, allowing eligible taxpayers to receive up to $1,700 per child as a refund. Income limits apply for the full credit.

Education Credits

Education credits also offer financial relief for higher education expenses. The American Opportunity Tax Credit (AOTC) provides up to $2,500 per eligible student for the first four years of post-secondary education. This credit is partially refundable, with up to $1,000 being refundable for qualified expenses. Eligibility requires the student to be pursuing a degree or credential and enrolled at least half-time.

The Lifetime Learning Credit (LLC) is a non-refundable education credit that can provide up to $2,000 per tax return for qualified education expenses. There is no limit on the number of years you can claim the LLC, and it applies to undergraduate, graduate, and professional development courses. Income limitations apply to this credit.

Retirement Savings Contributions Credit

The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is a non-refundable credit for eligible low- and moderate-income individuals who contribute to an IRA or employer-sponsored retirement plan. This credit can be up to $1,000 for single filers and $2,000 for married couples filing jointly, depending on income and contribution amounts.

Maximizing Tax Deductions

Tax deductions reduce your taxable income, lowering your overall tax liability. This can contribute to a larger tax refund. Taxpayers choose between taking the standard deduction or itemizing their deductions, opting for the greater tax benefit.

Standard Deduction

For the 2024 tax year, the standard deduction amounts are $14,600 for single filers and married individuals filing separately, $29,200 for married couples filing jointly and qualifying surviving spouses, and $21,900 for heads of household. An additional standard deduction is available for those aged 65 or older or who are blind.

Itemized Deductions

Itemizing deductions can be advantageous if your total eligible expenses exceed your applicable standard deduction amount. Common itemized deductions include home mortgage interest, state and local taxes (SALT), and charitable contributions. Accurate record-keeping is essential to substantiate these claims.

The mortgage interest deduction allows homeowners to deduct interest paid on qualified home loans. For mortgages incurred after December 16, 2017, you can deduct interest on up to $750,000 of mortgage debt. Higher limits apply to debt incurred before this date. Interest on home equity loans or lines of credit is deductible only if the funds were used to buy, build, or substantially improve the home.

The deduction for state and local taxes (SALT) allows itemizers to deduct property, sales, or income taxes paid to state and local governments. This deduction is subject to a $10,000 cap for most filers. Taxpayers must choose between deducting income taxes or sales taxes, not both.

Above-the-Line Deductions

Certain deductions, known as “above-the-line” deductions, reduce your taxable income regardless of whether you take the standard deduction or itemize. These are subtracted from your gross income to arrive at your adjusted gross income (AGI). Examples include contributions to traditional Individual Retirement Arrangements (IRAs) and student loan interest.

You can deduct up to $2,500 in student loan interest paid, provided certain income limitations are met. The deduction begins to phase out for single filers and for those married filing jointly.

Optimizing Tax Withholding

Tax withholding is the amount of income tax employers take out of an employee’s pay and send to the IRS. This process directly influences the amount of tax paid throughout the year and the size of any tax refund or amount owed.

Employees manage their withholding by completing a Form W-4, Employee’s Withholding Certificate, for their employer. This form allows you to indicate factors that affect your tax liability, such as your filing status, dependents, and any additional income or deductions. Adjusting the information on your W-4 increases the tax paid throughout the year.

Increasing your withholding means more money is sent to the IRS, which can result in a larger tax refund. Conversely, decreasing your withholding means more money in each paycheck but potentially a smaller refund or a tax bill. The goal is to avoid under-withholding, which could lead to penalties, while also not over-withholding excessively.

Self-employed individuals or those with significant income not subject to withholding are required to make estimated tax payments. These payments are made quarterly to the IRS to cover various taxes. Adjusting these estimated payments allows taxpayers to manage their tax liability and prevent underpayment penalties.