How to Increase Your Tax Refund This Year

A tax refund represents a reimbursement from the government when an individual has paid more in taxes than their actual tax liability throughout the year. This often occurs due to excess withholding from paychecks or overpayment of estimated taxes. While receiving a refund can feel like a financial bonus, it essentially means you have provided an interest-free loan to the government. Understanding how to proactively manage your tax situation can help you either receive a larger refund or adjust your withholding to keep more money in your paychecks throughout the year.

Adjusting Your Withholding

Managing your tax refund begins with understanding how your tax withholding works, primarily through the IRS Form W-4, Employee’s Withholding Certificate, which dictates the amount of federal income tax your employer withholds from each paycheck. Properly adjusting your W-4 can prevent overpayment throughout the year, directly influencing the size of your tax refund.

Reviewing and updating your W-4 periodically is a proactive step. Factors influencing your withholding include your filing status, the number of dependents you claim, other sources of income, and any itemized deductions you anticipate. For instance, if you get married, have a child, or significantly change your income, updating your W-4 can help ensure your withholding accurately reflects your current financial situation.

Accurately adjusting your W-4 aims to align the amount of tax withheld with your actual tax liability. If too much tax is withheld, you will receive a larger refund, but you forgo the immediate use of that money. Conversely, if too little is withheld, you might owe taxes and potentially incur penalties. The goal is to find a balance that suits your financial planning, allowing for more money in each paycheck if desired, or a more substantial refund at tax time.

Claiming Eligible Deductions

Deductions reduce your taxable income, which in turn lowers your overall tax liability and potentially increases your tax refund. Taxpayers generally choose between the standard deduction, a fixed amount based on filing status, or itemizing specific eligible expenses.

Common itemized deductions include mortgage interest, often reported on Form 1098. State and local taxes (SALT), such as property taxes and income or sales taxes, are also deductible, subject to an annual limit. For 2024, this limit is $10,000 ($5,000 for married filing separately). For 2025, this cap temporarily increases to $40,000 ($20,000 for married filing separately).

Charitable contributions to qualified organizations are deductible. Cash contributions are generally deductible up to 60% of adjusted gross income (AGI), while appreciated asset contributions are limited to 30% of AGI. Medical expenses exceeding 7.5% of AGI may also be deductible. Maintaining records, such as receipts and statements, is necessary to substantiate claimed deductions if your return is reviewed.

Utilizing Available Tax Credits

Tax credits directly reduce the amount of tax you owe, dollar-for-dollar, which can increase your tax refund. It is important to distinguish between refundable and non-refundable credits. Non-refundable credits can reduce your tax liability to zero but will not result in a refund if the credit amount exceeds your tax owed. Refundable credits can reduce your tax liability below zero, meaning any remaining credit amount is paid out to you as a refund.

Several tax credits can enhance your refund. The Child Tax Credit (CTC) offers up to $2,000 per qualifying child for 2024, with a portion potentially refundable as the Additional Child Tax Credit (ACTC), up to $1,700 per child. To qualify, the child must be under age 17 at year-end and meet other dependency and residency tests.

The Earned Income Tax Credit (EITC) is a refundable credit for low-to-moderate income working individuals and families, varying by income, filing status, and number of children. Education credits, such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), help offset higher education expenses. The AOTC can be up to $2,500 and is partially refundable, while the LLC provides up to $2,000 in non-refundable credit for qualified education expenses. The Child and Dependent Care Credit helps recover care expenses incurred to allow you to work, for qualifying individuals like children under 13 or dependents unable to care for themselves.

Strategic Use of Tax-Advantaged Accounts

Contributing to your current tax-advantaged accounts can reduce taxable income, thereby increasing your tax refund. Traditional Individual Retirement Arrangements (IRAs) and 401(k) plans are examples. Contributions to these accounts are tax-deductible in the year made, up to certain limits, directly lowering adjusted gross income.

For 2024, individuals can contribute up to $7,000 to a Traditional IRA, plus an additional $1,000 catch-up for those age 50 and over. For 401(k) plans, the employee contribution limit for 2024 is $23,000, with an extra $7,500 for those age 50 and older. Contributions must be made by the tax filing deadline for the prior year (April 15 for IRAs) to be deductible.

Health Savings Accounts (HSAs) offer another tax-advantaged opportunity. HSA contributions are tax-deductible, even without itemizing, and qualified withdrawals for medical expenses are tax-free. For 2024, HSA contribution limits are $4,150 for self-only coverage and $8,300 for family coverage, with an additional $1,000 catch-up for individuals age 55 and older. This triple tax advantage—deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses—makes HSAs an effective tool for healthcare savings and tax reduction.