If you paid more than what you owe in taxes throughout the year, you may be eligible to receive a tax refund.
You can increase the amount of your tax refund by decreasing your taxable income and taking advantage of tax credits.
Working with a financial advisor and tax professional can help you make the most of deductions and credits you’re eligible for.
Paying taxes is an unavoidable, necessary part of life. A silver lining, though, is the potential of receiving some of what you’ve paid in taxes back with a tax return. Maximizing your return, however, requires some know-how.
Below, we take a quick look at how tax returns work and offer ideas that could help you get a bigger refund—keeping more money in your pocket to put toward your financial goals. We’ll also discuss whether getting a big refund is really all it’s cracked up to be or if there might be a better target you can aim for in future years.
How do tax returns work?
When you file your tax return, you are essentially providing the IRS with the information it needs to determine your tax liability for the year—information about your income, interest or capital gains you may have earned, any deductions or credits you are claiming, your filing status, etc.
Using this information, the IRS will determine how much taxable income you have for the year, which tax bracket you fall under and ultimately what your total tax bill is for the tax year. If your tax return shows that you have overpaid your taxes throughout the year—for example, because you withheld more from your paychecks than what you owe—you’ll get a tax refund. If it shows that you underpaid throughout the year, you’ll end up owing money.
What determines how big your tax return is?
Ultimately, to minimize what you owe in taxes and increase the likelihood of getting a bigger tax refund, you’ll need to find ways to reduce your taxable income—or the portion of your income that you’ll be required to pay taxes on. The good news is: By having a good understanding of tax regulation and working with a professional, there are many ways you can do this.
How to maximize your tax refund
Here are some actions you can take that can help you get the most back on taxes:
1. Itemize your deductions
Deductions are dollar amounts you’re able to subtract from your taxable income, reducing the amount you’ll owe in taxes. What you’re able to deduct and how much depends on many factors, like your taxpayer status and other qualifying expenses. Each tax year, you can decide to either take the standard deduction or itemize your deductions.
The standard deduction is the baseline tax deduction that all taxpayers are entitled to if they choose to forego itemization. For the 2023 tax year, the standard deduction is:
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It’s been estimated that approximately 90 percent of American taxpayers opt for the standard deduction—partly because it’s easier than itemization and partly because it often allows them to claim a higher deduction than would be possible through itemization. But if you have a lot of eligible expenses, you may be better off itemizing in lieu of claiming the standard deduction.
To decide which is right for you, add up your eligible expenses and compare it against the standard deduction. If itemizing results in a higher amount, that is most likely the route that you should take.
2. Contribute to tax-advantaged accounts
Another way to lower your taxable income for the year is to contribute to one or multiple tax-advantaged accounts. These are special types of accounts designed to incentivize saving and investing for certain financial goals—like retirement.
The tax incentives offered can take multiple forms. For example, contributions you and your employer make to a traditional 401(k) are not included in your taxable income for the year. Instead, these taxes are deferred until you withdraw them in retirement. With an IRA, you may be eligible to deduct the amount you contributed to your IRA that year from your taxable income. Though different types of accounts come with different benefits, contributing to a tax-advantaged account will generally help reduce what you owe in taxes in a given year.
Examples of tax-advantaged accounts that you might consider contributing to include:
Retirement accounts: When you contribute to a traditional retirement account, such as a 401(k), 403(b), or IRA, you are making pre-tax contributions. (Contributions to Roth accounts are made after taxes and do not lower your taxable income in the current year.)
Health savings accounts (HSAs): Contributions to an HSA to cover medical expenses are made with pre-tax funds and therefore will lower your taxable income for the year.
529 college savings plans: Contributions to 529 plans are made with after-tax funds, so they will not lower your federal income. But depending on your state (and the plan you are contributing to) these contributions may lower your taxable income on your state tax filing.
Make informed financial decisions.
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3. Ensure you are claiming the right credits
A tax credit is a dollar-for-dollar reduction in the amount of taxes that you owe the IRS. This makes them even more valuable than tax deductions, which simply reduce your taxable income for the year.
Consider, for example, a single filer who falls in the 22 percent tax bracket for the year and owes the IRS $5,000. If that single filer received a $1,000 tax deduction, it would translate into savings of $220, lowering their tax bill to $4,780. If the same filer received a $1,000 tax credit instead, their tax bill would be lowered dollar-for-dollar down to $4,000.
Can you claim a tax credit even if you don’t owe the IRS any money for the year? That will depend on whether the credit is refundable or non-refundable. Refundable tax credits, while rare, don’t just lower your tax bill—they can boost your refund. A taxpayer owing $500 in taxes for the year, but who receives a $1,000 refundable tax credit, for example, won’t just knock their bill down to $0; they’ll also increase their refund by $500.
There are many credits, refundable and non-refundable, that you may be entitled to. Some of the most common that you should be aware of include the:
4. Adjust your filing status
Your filing status will directly affect your standard deduction. It will also affect which tax bracket you fall under and which tax credits you are eligible to claim.
A single filer, for example, will qualify for a much lower standard deduction compared to someone filing as a head of household. A single tax filer also will fall into a higher tax bracket even when making less money. Married couples can decide if they’re better off filing jointly or separately, depending on their incomes and other factors.
It’s important to regularly revisit your tax filing status as your personal situation changes. Whether you get married or divorced, have children or purchase a home, life changes can impact what filing status will be most tax efficient in that year.
Quick View Tax Guide
Download your complimentary copy of Northwestern Mutual’s Quick View Tax Guide. This guide can help you ensure you understand your applicable federal income tax rates and that you are taking advantage of every deduction and credit available to you.
Is it better to owe taxes or get a refund?
If your tax planning approach is aimed at getting as large a refund check back from Uncle Sam as possible, you're not alone. According to one recent study, an estimated 59 percent of Americans expect to receive a tax refund for the 2023 tax year.
But most financial experts agree that getting back a large refund isn't really something that individuals should be aiming for.
Sure, it's better than owing money to the IRS. But the best-case scenario would actually be to fine-tune your withholdings so that you’re having the right amount of taxes taken out of each paycheck. When tax season comes around, this means you may not be getting a check back—but you won't owe one, either.
Why? Because when you get a tax refund, it essentially means that you loaned that money to the government. Had you not overpaid, you would have had more of that money at your disposal each paycheck throughout the year. And more money in your pocket means more opportunity to put your money to work for you—growing through investments, paying off expensive debt or building an emergency fund.
The benefit of using financial professionals to help you tax plan
Nobody wants to pay more in taxes than they have to. By thinking carefully about your deductions, credits, filing status and taxable accounts, it's possible to boost your refund so you're keeping more money where it can serve you best—in your pocket.
But, navigating tax code is not as simple as it may sound. Unsure whether you should take the standard deduction, itemize or perhaps pursue bunched itemized deductions? Don't know which filing status will provide the best tax options for your situation? Unclear about the tax-advantaged accounts you should be contributing to or the tax credits you may be entitled to claim? A Northwestern Mutual financial advisor or tax professional can help you learn about taxes and how different approaches can affect your larger financial plan.
James Klaffer has over 28 years of experience in individual taxation—including many years with a Big Four accounting firm. At Northwestern Mutual, he provides in-depth tax planning ideas for high-net-worth individuals and those working with expatriate/foreign national tax issues.