7 Ways to Get a Bigger Tax Refund
In fiscal 2016, the IRS processed more than 244 million tax returns, collectedmore than $3.3 trillion in tax dollars, and sent out more than 122 million refunds totaling more than $426 billion. Tax refunds to individuals totaled about $369 billion, with the average refund around $3,000.
There's a good chance that whether your refund was bigger or smaller than $3,000, you would like it to have been larger than it was. Here, then, are seven ways to get a bigger tax refund.
Image source: Getty Images.
1. Hire a tax pro
If you'd rather not read this whole article (even though you should) because you hate thinking about and dealing with taxes, you might get a bigger tax refund by letting someone else minimize the taxes you pay. Consider hiring a tax pro to prepare your return and offer strategies to you. This option does cost some money -- possibly a few hundred dollars for a good pro -- but there's a good chance the pro will save you more than you spend on their service. A good tax pro will be up on the latest tax-law changes and will know far more about the tax code than you do. Don't just hire anyone, though. Ask around for recommendations. Consider hiring an "Enrolled Agent," a tax pro licensed by the IRS who is authorized to represent you before the IRS if need be. You can find onethrough theNational Association of Enrolled Agents.
2. Take lots of deductions
Taking lots of deductions can shrink your taxable income and beef up your tax refund. It's easiest, of course, to take the standard deduction, but you might be able to save money by itemizing your deductions. If you don't really have enough in deductions to make that worth it, see if there are any deductible expenses you can bring forward from next year to this year. For example, if you're planning to make some big donations to some charities next year, doing so this year will let those contributions count for this tax year. (You can also donate household items and clothing to charity.) If you know you have qualified medical expenses such as Lasik surgery or lab work coming up in the next year or so, you might try to move them up to this year, such as in December. Read up on deductions, as there are many that might apply to you, such as student loan interest and even gambling losses. You can even deduct tax-preparation fees.
Image source: Getty Images.
3. Take credit(s)
Tax credits are more valuable than deductions, as they shrink your taxable income on a dollar-for-dollar basis. They're available for all kinds of things, such as education expenses, energy-efficient home improvements, the adoption of children, the care of children and dependents, and much more. A particularly powerful credit is the Earned Income Tax Credit (EITC). It's available to millions of people with relatively low incomes and if you qualify for it, the EITC can shrink your tax bill and boost your refund considerably. For the tax year 2017, the maximumcredit is $6,318, and the averagecredit that qualifying folks take has recently been around $2,400.
4. Refinance your mortgage
Mortgage interest is generally deductible, too, and you may be able to get a bigger tax refund by refinancing your mortgage. A new mortgage will start, as they all do, with interest making up the majority of your payments in the first years. Don't just refinance for the tax break, though. The refinancing needs to make sense, such as if you secure a meaningfully lower interest rate (one rule of thumb suggests only refinancing if you can get a rate that's at least 1 percentage point lower) or if you switch into a loan that serves you better, such as a 15-year mortgage.
Image source: Getty Images.
5. Save for retirement
You can reduce your taxable income considerably by making contributions to a traditional IRA or 401(k) account. IRA contribution limits in 2017 are $5,500 for most folks and $6,500 for those 50 or older. 401(k) contribution limits are $18,000 for most people and $24,000 for those 50 or older. If you can sock away, say, $10,000 in such accounts this year and you're in the 25% tax bracket, you could shave $10,000 off your taxable income, enabling you to avoid paying $2,500 in taxes on that sum. That will enlarge your tax refund.
Of course, you might prefer to save for retirement in a Roth IRA and/or a Roth 401(k). Those give you no upfront tax break, but offer tax-free withdrawals in retirement.
6. Use the right filing status
Don't assume that just because you're unmarried that you should file your tax return using the single filing status. If you're a single parent or support a dependent, you may qualify for the head of household status, which offers more favorable tax rates and a significantly higher standard deduction. (For 2016, for example, the standard deduction for singles and married folks filing separately is $6,350, but it's $9,350for heads of households.) Meanwhile, if you're married, run the numbers to see whether you're better off filing jointly or separately. Filing jointly is more likelyto result in a bigger refund, but everyone's situation is different. Filing separately can make sense in various situations, such as if one spouse has high medical expenses or if the marriage is rocky.
Image source: Getty Images.
7. Claim fewer allowances
We all fill out W-4 forms when we first start a job. However, many allowances you claim determine the amount withheld from your paycheck for taxes. In general, the moreyou claim, the less will be withheld. There's a worksheet with the W-4 form that helps you determine how many to claim, including taking one each for yourself, your spouse, and qualifying dependents. You can add allowances if you work more than one job, have a spouse who works, and have significant child and dependent care expenses. You get to choose how many allowances to claim and you can update your W-4 form any time. If you claim fewer allowances, more money will be withheld from your pay for taxes, and that can lead to a fatter tax refund.
Hold on -- you may not want a big tax refund!
Tax refunds certainly seem like wonderful things, but it's actually best to receive a refund of $0. Why? Well, because while it may feel like you're receiving a windfall gift from the government, a refund actually means that you overpaid your taxes due during the course of the year, making funds available for Uncle Sam to use that were not available for you to use. It's best if, throughout the year, you fork over only what you need to fork over, keeping the rest of your dollars for your own use.
Still, refunds can be put to good use -- especially if, for example, you haven't been very good about saving throughout the year and you can divert your tax refund into retirement savings or some other productive purpose.
The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.