Federal Income Tax

Ways to Maximize Tax Refund

How to maximize tax refund—without a doubt is the most commonly asked question every tax season. Finding ways to maximize tax refund takes a great effort.

Table of Contents

You should always keep up with the tax changes that apply to your tax return. As long as you know the tax changes, you can find a way to reduce taxable income, thus, pay less tax. Although paying less tax doesn’t translate to a higher tax refund at all times, it’s where you should start.

First and foremost, before we get to explaining ways to maximize your tax refund, let us explain how tax refunds work. The reason why we have such a thing as tax refunds is all about how we pay taxes. The Internal Revenue Service (IRS) requires taxpayers to pay their income taxes gradually throughout the year.

While self-employed individuals estimate their tax payments and pay the IRS, employees pay taxes through withholding. Employers withhold a portion of their employees’ income and forward it to the IRS. If the taxes withheld or paid is more than what’s owed in total, the IRS will refund the excess amount. This is called the tax refund.

Increasing Tax Refund by Withholding and Paying More Tax

Increasing Tax Refund by Withholding and Paying More Tax

It is possible to increase tax refunds by withholding more tax or paying more tax. However, this isn’t a very convenient method. If you think paying more tax increases your tax refund, you’re right, but you’re basically loaning your money to the government, only to get it back at a later date—interest-free.

Instead of paying or withholding tax excessively, it’s going to be in your best interest to save your money in a savings account. At least you will earn interest on the money you saved up. The bottom line is you should try to increase your tax refund by minimizing tax liability as much as you can.

Tax Deductions

Tax deductions are the only way to reduce taxable income for the most part. You can make adjustments to your income if you have qualifying expenses but they will only worth a fraction of what you get in deductions.

Related Article: Tax Brackets 2021

When it comes to deductions, you will have two main options; you can either itemize or take the standard deduction. Each has its own pros and cons but you should always go with one that reduces your taxable income the most.

Itemizing vs. Standard Deduction

Most taxpayers claim the standard deduction on their tax returns. This is due to the high value of the standard deduction. After the Tax Cuts and Jobs Act of 2017, the standard deduction has been nearly doubled. This made the standard deduction a lot more attractive compared to itemizing. 2021 shouldn’t an exception to this and more than 90% of taxpayers are anticipated to take the standard deduction.

For the 2021 tax season, we expect the standard deduction to be as follows.

Filing StatusAmount
Single$12,600
Married Filing Separately$12,600
Married Filing Jointly$25,200
Head of Household$19,950
Qualifying Widow(er)$25,200

The above amounts are determined based on the prior years’ increases. Since 2018, the standard deduction has been increased by $200 for single filers, therefore, $400 for joint filers, and between $300 to $350 for those who file taxes as head of household.

The standard deduction amount is important because it gives you a reference point about deductions. Whether you are anticipated to take the standard deduction in 2021 or not, figure out your itemized deductions. If itemizing gives you a higher deduction, itemize. If not, take the standard deduction. This is as simple as it goes when choosing between itemizing and the standard deduction.

Adjustments to Income

As mentioned earlier, there are adjustments you can make to your income in addition to deductions. While you’re going to use Schedule A for itemizing, Schedule 1 must be used for adjustments to income. On Schedule 1, you can also report additional income you’ve earned. What counts as additional income? We listed them below.

  • Taxable Refunds, Offsets, Credits, State and Local Income Taxes
  • Alimony Payments Received
  • Business Income and Losses
    • Other Gains and Losses
  • Rental Real Estate, S corporations, Trusts, Partnerships, Royalties
  • Farm Income and Losses
  • Unemployment Compensation

In addition to the above, you can also enter other income you’ve earned and all the additional income will be added to your gross income. Because of this, you need to file Form Schedule 1 before 1040 and figure out total gross income before subtracting adjustments and deductions.

As for the adjustments you can make to your income, they are mostly limited. For example, if you’re paying a student loan, the interest you’ve paid during the tax year is deductible. However, you can only deduct up to $2,500 and your Modified Adjusted Gross Income must be less than $70,000 if single or double that if filing jointly.

Because adjustments aren’t as valuable as deductions, they might not reduce taxable income significantly but they will definitely help you save money.

Tax Credits

Tax Credits

Tax credits have a higher value than deductions. While deductions lower taxable income, credits lower the tax liability. Think of it like this, your total tax liability for 2020 is $3,500. You claim the Child Tax Credit which has a value worth up $2,000, you now owe $1,500. With that said, tax credits are much valuable than deductions.

Tax credits are further divided into two categories; refundable credits and non-refundable credits. As you can understand from their titles, refundable credits give you a refund and the non-refundable credits don’t. Since your tax liability for the tax year might be below $0, up to a certain amount of the tax credit will be added to your tax refund.

Here is an overview of the tax credits you may be eligible to claim.

Earned Income Tax Credit

Earned Income Tax Credit or shortly known as EITC is a refundable tax credit that is for individuals and families with low-to-moderate income. The EITC depends on the income of the working individual or the couple and the number of children.

Note: If you’re married but filing separately, you won’t qualify for the EITC.

For the 2020 taxes which you’ll be filing in 2021, hopefully by April 15 deadline, here are the income limits for the EITC.

EITC Income Limits

Filing Status0 Qualifying Children1 Qualifying Children2 Qualifying Children3 Qualifying Children
Married Filing Jointly$21,710$47,646$53,330$56,844
Single/Head of Household/Qualifying Widow(er)$15,820$41,756$47,440$50,954

Regardless of your filing status—as long as you qualify for the EITC, here are the maximum credit amounts for the 2021 tax season.

EITC Maximum Credit Amounts

0 Qualifying Children1 Qualifying Children2 Qualifying Children3 Qualifying Children
$538$3,584 $5,920 $6,660 

Considering EITC is refundable with a high potential credit amount, you can increase tax refund significantly. Learn more about Earned Income Tax Credit.

Child Tax Credit

Child Tax Credit is another tax credit that is available to most American families. If you have a qualifying child —we will get into it just in a bit—you can qualify for up to $2,000 tax credit and as much as $1,400 of it is refundable.

If your Modified Adjusted Gross Income is less than $200,000 if single or $400,000 if filing a joint return, you can take full advantage of the Child Tax Credit. There are six other qualifications for the Child Tax Credit. These are as follows.

  • Age
    • The child must be under the age of 17 by the end of the tax year.
  • Relationship
    • The child must be directly related to you, meaning he or she can be your; own child, adopted child, sister, brother, step sister, step brother, cousin, etc. It is also possible to claim the Child Tax Credit for a nephew, niece, and grandchildren.
  • Residency
    • The child must have lived with you for more than half of the tax year.
  • Support
    • The child must not have provided more than half of her or his financial support during the tax year.
  • Dependency
    • The child must be claimed as a dependent on your tax return.
  • Citizenship
    • The child must be a U.S. citizen, U.S. national, or a U.S. resident alien. A U.S. national refers to those who are born in Commonwealth of the Northern Mariana Islands or in American Samoa.

With the $1,400 refundable, Child Tax Credit is definitely going to help most American families.

Tax Credits for Students

Tax Credits for Students

There are two main tax credits for eligible students. One is for the first four years of higher education and the other is for any years of a post-secondary education.

Lifetime Learning Credit

Lifetime Learning Credit is for students who are in any years of post-secondary education. This tax credit is available to most students. Even if you’re not pursuing a degree, you can get up to $2,000 in tax credits.

To claim Lifetime Learning Credit, you must be a post-secondary student with an income of less than $58,000 if single or $116,000 if filing jointly.

Lifetime Learning Credit isn’t refundable, so the extra won’t be included in your tax refund.

American Opportunity Credit

For the four years of your post-secondary education, you can claim the American Opportunity Tax Credit. This tax credit is formerly known as the Hope Credit.

The maximum credit is available to students with a Modified Adjusted Gross Income of less than $80,000 and $160,000 if filing jointly. The student must be enrolled in post-secondary education for at least half-time for at least one academic year.

Unlike the Lifetime Learning Credit, the American Opportunity Tax Credit is refundable. Not all of it is refundable though. Only 40% of the available American Opportunity Credit is refundable which is $1,000 if the maximum amount is eligible.

Final Point

Some of the above is definitely subject to change such as the deductions and credits. One thing that will always remain the same is you must take advantage of the tax code and increase your refund.

Before you file your tax return, always make sure to consider your other options. You can never maximize your tax refund by paying more to the IRS. This won’t be maximizing your refund. Instead, you would be paying extra to the government just to get back your money months later.

The final point is to take advantage of the tax code by claiming what you deserve. You would not believe how many deductions and credits go unclaimed each year.

Since you need to be a tax expert to know every deduction and credit that is out there, we suggest filing taxes electronically with a paid package. Most e-file providers search for the deductions and credits taxpayers are eligible for them. The price you pay for filing taxes electronically is definitely going to be worth it and you may get way more in return.

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