Understanding Your Tax Refund

What is a Tax Refund?

A tax refund is the amount of money that the government owes you after you’ve paid too much in taxes throughout the year. It’s essentially a reimbursement for the excess taxes you’ve paid. When you file your tax return, you’re reporting your income and expenses to the government, and if you’ve overpaid, you’ll receive a refund. The amount of your tax refund depends on various factors, including your filing status, taxable income, and the tax credits and deductions you’re eligible for.

What Goes into Filing Taxes

Filing your taxes doesn’t have to be complicated. You shouldn’t be intimidated by them. However, it is important to understand some basic concepts so you can receive the maximum refund.

There are credits available that can lower your tax liability. It’s important to know which ones apply to your circumstances.

Another way to maximize your refund is through deductions. There are two options when it comes to deductions. One is the standard deduction, and the other is the itemized deduction. You can only take one deduction type, not both. You’ll need to decide which one makes the most sense so you can get the maximum tax refund. Evaluating whether to take the standard deduction or itemize deductions is crucial for maximizing your tax refund.

Understanding the Standard Deduction

The standard deduction is a flat rate and can be automatically subtracted from your adjusted gross income (AGI). The amount applied is based on what your filing status is at the end of the tax year and is also tied to inflation.

Your filing status can affect the amount of tax you owe or what type of refund you receive. There are five filing statuses.

Single Status

As of the last day of the calendar year, you must not be married or be legally separated, divorced, or widowed. The standard deduction in 2024 for a single status is $14,600. The 2025 standard deduction is $15,000.

Married Filing Jointly

Joint returns combine the income and allowable expenses of both spouses (expenses are not applied with a standard deduction). The 2024 standard deduction is $29,200, and for 2025, it's $30,000.

Married Filing Separately

Two spouses each report their own income and deduction on separate returns (deductions are not applied with a standard deduction). The standard deduction for 2024 is $14,600 per spouse. Please note that in a community property state filing separately may not be an option.

Head of Household

If you are unmarried or “considered unmarried’ on the last day of the tax year and pay more than half of the household expenses for the required period of time. You must also have a qualifying person who is dependent and has been living in your home for more than half the year (temporary absences, such as school, don't count). In 2024, the standard deduction is $21,900, and in 2025, it's $22,500.

Qualifying Widow(er)

This allows a surviving spouse to use the married filing jointly tax rates on an individual return for up to two years following the death of the individual's spouse. To qualify, the surviving spouse must remain unmarried for at least two years following the spouse's death. The standard deduction for 2024 is $29,200, and for 2025, it's $30,000.

You have the choice to file in a couple of different ways, but your decision will impact your return.

One example is a head of the household standard deduction is larger than a single standard deduction. Another example is married couples. They have the option to file jointly or separately. But, filing separately will result in a higher overall tax liability.

 It’s wise to check with an accountant to explore which option is best for you.

Understanding Itemized Tax Deductions

Itemized deductions are when you subtract certain expenses from your AGI, therefore reducing your taxable income. To itemize deductions, you need to evaluate whether itemizing will lead to a larger reduction in taxable income compared to taking the standard deduction.

Unlike the flat rate that the standard deduction has, itemizing lets you deduct specific expenses. Itemizing is usually used if the expenses are larger than the standard deduction amount.

Some typical itemized deductions are:

• mortgage interest
• medical or dental expenses
• charitable donations
• state and local income taxes

As mentioned earlier, you cannot take both the standard deduction and itemized deduction at the same time. You must choose which one you want.

If you’re not sure, consult an accountant.

Tax Credits You Should be Taking

A tax credit is crucial for achieving the biggest tax refund possible.

A deduction reduces taxable income and results in a marginally lower tax bill. But a tax credit is a direct dollar-to-dollar reduction of your tax bill.

There are two types of tax credits. One is refundable, and the other is nonrefundable.

A refundable tax credit is entirely refundable. This means if the credit brings your tax liability down to zero, any extra money in the credit will be refunded to you. For example, if the credit is for $2,000 and half of it brings your tax liability down to zero, you’ll receive the leftover $1,000.

But with a nonrefundable tax credit, you would not receive that leftover $1,000.

There are several types of credits available.

Child Tax Credit

The Child Tax Credit is for parents with children under 17 at the year’s end. For 2024 and 2025 the credit is $2,000 per child. There’s a refundable amount of $1,700 for each qualifying child if you earn up to $200,000 as an individual filer or $400,000 for joint filers.

The benefit phases out with higher incomes.

Child and Dependent Care Credit

This credit goes to taxpayers who pay out-of-pocket expenses for childcare. It applies to children 12 years or younger at the end of the calendar year.

It also can be applied for the care of a disabled spouse or qualified dependent.

The credit equals a percentage of work-related expenses you paid someone to care for your child or qualifying dependent.

Earned Income Tax Credit

The earned income tax credit (EITC) helps low-to-moderate-income workers and families get a tax break.

In the tax year 2024, the maximum credit is $7,830; for 2025, it's $8,046. There are income restrictions as well as limits on investment income.

Tax Planning Strategies

Time Your Income and Expenses

Timing your income and expenses can help you minimize your tax liability and maximize your tax refund. For example, if you’re self-employed, you may be able to delay invoicing clients until the next tax year, reducing your taxable income for the current year. Similarly, you can accelerate expenses by making charitable donations or paying medical bills before the end of the year. This strategy can help you reduce your taxable income and increase your tax refund.

Utilize Tax-Efficient Investments

Where you invest your money can have a significant impact on your tax bill. Tax-efficient investments, such as index funds or municipal bonds, can help you minimize your tax liability. These investments often have lower tax implications, which can help you keep more of your money. For example, if you invest in a tax-deferred retirement account, such as a 401(k) or IRA, you can reduce your taxable income and lower your tax bill.

Contribute to a Health Savings Account

A Health Savings Account (HSA) is a tax-advantaged account that allows you to set aside money for medical expenses. Contributions to an HSA are tax-deductible, and the funds grow tax-free. You can use the money in your HSA to pay for qualified medical expenses, and the withdrawals are tax-free. By contributing to an HSA, you can reduce your taxable income and lower your tax bill. Additionally, HSAs often have higher contribution limits than other tax-advantaged accounts, making them an attractive option for those who want to maximize their tax savings.

Other Ways to Maximize Tax Refund

If you have a 401(k) plan or an individual retirement account (IRA), you can reduce your tax burden by contributing to these retirement accounts. The funds you deposit in these accounts are pretax. That means you won’t have to pay taxes on it until you withdraw it. It lowers your current income.

It’s also important to contribute to your Health Savings Account (HSA). There are two reasons to do this. One, you can make pre-tax contributions through payroll deductions just like you do with your 401(k), which lowers your taxable income. But, you can also make direct contributions that are 100 percent tax-deductible contributions.

The best part of an HSA is that as long as you withdraw the money for medical expenses, you won’t have to pay taxes. That’s a good deal.

Where you save your money influences your tax bill. For example, if you put $1,000 in your savings, you might have to pay taxes on that interest.

But if you put that money in a tax-advantaged account like an HSA or IRA, that money will reduce your income.

One of the best ways to maximize a tax refund is to meet with tax professionals. They will ensure you have all the proper deductions and credits. It’s also a good idea to have them help you plan for the next tax season, so you’re ready.