Filing your annual tax return is right up there with visiting the dentist for most people—you just sit tight and get through it. The process can be especially painful if you end up with a big fat tax bill or a much smaller refund than you were expecting.
You’re not alone in your frustration. In Gallup’s annual Economy and Personal Finance survey, conducted in April 2023, six in 10 Americans say the amount of federal income tax they pay is “too high”—the highest level seen since 2001.
But learning to maximize your tax return can help you take control of the process, pay less in taxes, and avoid filing surprises.
Key Takeaways
- Understanding the different filing statuses can help you choose the most advantageous one for you.
- Identifying and claiming tax deductions will reduce your taxable income.
- Exploring tax credits can significantly increase tax refunds.
- Maximizing contributions to retirement accounts can increase tax benefits.
- Consider adjusting withholding to optimize tax refunds.
“Maximizing your tax return is like giving yourself a bonus at the end of the year,” says Lee Reams Sr., co-founder of TaxBuzz, which connects taxpayers with tax and accounting professionals. “It’s a way to ensure you’re not overpaying the government and that you’re keeping more of your hard-earned money in your pocket.”
From choosing the best filing status for your situation to taking advantage of tax deductions and tax credits to leverage tax-advantaged accounts, here are some effective techniques and top tips for optimizing your tax return this year.
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Understand Your Filing Status
Determining the most advantageous filing status for your situation is a crucial step in maximizing your tax return, says Reams. “Your filing status can affect the amount of tax you owe, and in some cases, it can even determine whether you must file a tax return,” he adds.
Different Filing Statuses
- Single: As of the last day of the calendar year, to file single, you must not be married, or be legally separated, divorced, or widowed.
- Married filing jointly: Joint returns combine the income and allowable expenses of both spouses.
- Married filing separately: Two spouses each report their own income and deductions on separate returns. Note that if you live in a community property state, this may not be an option.
- Head of household: This filing status may be used if you are unmarried or “considered unmarried” on the last day of the tax year, paid more than half the cost of household expenses for the required period of time, and had a qualifying person living in your home for more than half the year (temporary absences, such as school, do not count).
- Qualifying widow(er): This filing status allows a surviving spouse touse themarried filing jointlytax rates on an individual return, for up to two years following the death of the individual’s spouse.To qualify, the taxpayer must remain unmarried for at least two years following the death of their spouse.
In many cases, taxpayers could file in a couple of different ways, and their decision will impact their return. For example, filing as head of household instead of single provides a larger standard deduction and lower tax rates, says Reams. And while married couples have the option of filing jointly or separately, in most cases, filing separately will result in a higher overall tax liability.
To determine the most advantageous filing status for maximizing tax returns, a tax professional or tax software can help you crunch the numbers.
What You Invest
Take Advantage of Tax Deductions
Tax deductions are important and can be used tactically to reduce taxable income.
The first decision you’ll need to make is whether it’s worth it to itemize. The standard deduction was increased when the Tax Cuts and Jobs Act (TCJA) was passed at the end of 2017, making it unnecessary for most people to itemize with a Schedule A form.
| Standard Income Tax Deductions: 2023 & 2024 | ||
|---|---|---|
| Filing Status | 2023 Standard Deduction | 2024 Standard Deduction |
| Single | $13,850 | $14,600 |
| Married filing separately | $13,850 | $14,600 |
| Head of household | $20,800 | $21,900 |
| Married filing jointly or qualifying widow(er) | $27,700 | $29,200 |
If you’re age 65 or older, there’s an additional deduction of $1,850 if you’re single or head of household, and if you’re married filing jointly or separately, the extra deduction is $1,500 per individual for tax year 2023. Those figures increase for tax year 2024 to $1,950 and $1,550, respectively.
If you do itemize, some common tax deductions include homeownership-related ones, medical expenses, and charitable donations.
- Homeownership: Some of the tax deductions you may qualify for as a homeowner include mortgage interest, points, and property taxes.
- Medical: The Internal Revenue Service (IRS) allows a deduction for medical expenses that exceed 7.5% of your adjusted gross income (AGI). So, for example, if your AGI is $100,000, and you spent $10,000 in out-of-pocket medical expenses (7.5% of your AGI is $7,500 in this case), then you can deduct $2,500.
- Charity: If you itemize, you can usually write off up to 20% to 60% of your adjusted gross income for charitable contributions.
“But there are also above-line deductions that are often overlooked,” Reams says. Above-line refers to deductions that are available whether a taxpayer itemizes or takes the standard deduction. For example, student loan interest, educator expenses, and Health Savings Account (HSA) contributions are deductions that don’t require you to itemize.
In addition to the well-known tax deductions, there are also some overlooked deductions to consider. A couple of examples:
- Gambling losses: Your losses are fully deductible, up to your gambling winnings. “This means you can, in fact, deduct the $100 lost betting on the Jets, assuming you also gained $100 betting on the Chiefs,” saysFred Freifeld, certified public accountant (CPA) and principal of tax and accounting services for Fiske & Company in South Florida.
- Small business expenses: If you’re a small business owner, self-employed, or a freelancer, you may be able to deduct some of your home expenses if you work out of a home office, some of your business travel, and even health insurance premiums.
Keep in mind that some deductions have various eligibility criteria or may require you to provide documentation.
For example, student loan interest deduction begins to phase out for taxpayers with modified adjusted gross income (MAGI) of more than $75,000 ($155,000 for joint returns), and is completely phased out for taxpayers with MAGI of $90,000 or more ($185,000 or more for joint returns).
For the 2024 tax year, the MAGI phase out begins at $80,000 ($165,000 for joint returns) and maxes out at $95,000 ($195,000 for joint returns).
As far as documentation, you’ll also want to keep relevant receipts for any deductions you’re claiming, such as medical bills, casino loss statements, business purchases, etc.
Explore Tax Credits
A tax credit is different from a tax deduction. While a deduction reduces taxable income and therefore results in a marginally lower tax bill, a tax credit is a direct dollar-to-dollar reduction of your tax bill.
There are also two types of tax credits. Refundable tax credits are entirely refundable, meaning if your tax bill is reduced to zero, then any remaining dollars from a refundable credit are sent to you, courtesy of the U.S. Treasury. Nonrefundable tax credits can reduce your tax bill down to zero, but anything beyond that will not be paid to you.
Some popular tax credits can significantly increase tax refunds. These include:
- Child Tax Credit: The Child Tax Credit is for parents with children under the age of 17 at year’s end. For the 2023 tax year, the credit is $2,000 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 tax credit is offered to taxpayers who pay out-of-pocket expenses for child care for an individual 12 or younger as of year’s end. It can also be applied if you need care for a disabled spouse, or a qualified dependent. The credit equals a percentage of work-related expenses you paid someone to care for your child or another qualifying person.
- Earned Income Tax Credit: The earned income tax credit (EITC) helps low- to moderate-income workers and families get a tax break. Some of the qualifications include having worked and earned income under $63,398 and having investment income below $11,000.
- Energy-Efficient Home Improvements: The Residential Clean Energy Credit offers 30% of the costs of new, qualified clean energy technology installed in your home anytime from 2022 through 2032.
If tax deductions are the silver coins of the tax world, tax credits would be the gold bars.
— Fred Freifeld, CPA, principal of tax and accounting services for Fiske & Company
Maximize Contributions to Retirement Accounts
Contributions you make to certain retirement accounts like traditional individual retirement accounts (IRAs) or 401(k)s are not included in your taxable income, resulting in a lower tax liability, says Freifeld. So, let’s say you earned $100,000, but you contributed $20,000 to your 401(k); your taxable income would be $80,000.
A Roth IRA does not impact your current-year tax return, however, as all tax savings are captured upon withdrawal at retirement age, Freifeld adds.
If you have the financial means, it benefits you tax-wise to bump up your retirement contributions as close to the maximum allowed as possible.
Consider Adjusting Withholding
When taxes are taken out of your paycheck, it’s your employer withholding income taxes and paying the IRS on your behalf. Your Form W-2, Wage and Tax Statement lists your wages paid and amounts withheld.
If you didn’t request to withhold enough, you may end up owing; if you withhold too much, you may get a refund. Ideally, you should aim to break even, but the IRS reports that about 70% of taxpayers withhold too much every year.
Though it might feel nice to get a tax refund, withholding too much is like giving the government a free loan while lowering your take-home pay. And if you don’t withhold enough, you can be hit with a surprise tax bill.
To decide if you should make adjustments to your tax withholding, you can use the IRS’ Tax Withholding Estimator tool. If you think you want to make an adjustment to the amount withheld, you’ll have to fill out IRS Form W-4 and give it to your employer. The earlier in the year you make the adjustment, the more impact it will have on your tax return.
Utilize Tax Planning Strategies
When you make financial decisions through the lens of tax planning, you can end up keeping more of your income and pay less to the government. Here are a few strategies to think about:
More Tips To Save
Time Your Income and Expenses
Self-employed people who had a high-earning year might push off invoicing for some work to the next calendar year, or stock up on extra business supplies at the end of the year to increase their deductions. Others might wish to make a lump sum of charitable donations before the end of the year.
Another strategy that requires the right timing is tax-loss harvesting, in which you sell an investment at a loss to offset taxes owed on income or capital gains.
Utilize Tax-Efficient Investments
Where you put your money could have an impact on your tax bill. For example, if you simply put $20,000 into a savings account, the only tax implications might be that you’ll have to pay tax on any interest earned. On the other hand, if you put $20,000 into various tax-advantaged accounts like IRAs or HSAs instead, that amount will reduce your taxable income.
Move to a Tax-Friendly Location
If you’re planning to move when you retire or for any reason, you might consider a state that has more favorable tax treatment, such as no state income tax. This can help you keep more of your money, which can be a big deal if you’re on a fixed income.
Contribute to Your Health Savings Account (HSA)
HSAs are unique accounts in that they have numerous tax advantages. First, you can make pretax contributions through payroll deductions, which will lower your taxable income. You can also make direct contributions to an HSA, which is 100% tax-deductible from your income.
For 2023 (the taxes you are filing in 2024), the maximum HSA contribution is $3,850 for an individual and $7,750 for a family. For 2024 (what you’ll file next year), the maximum HSA contribution is $4,150 for an individual and $8,300 for a family. And if you are age 55 or older, you can make a $1,000 catch-up contribution.
Unlike an IRA that requires you to pay taxes on your earnings when you withdraw, when you make withdrawals from your HSA, as long as they are used for qualified medical expenses, you won’t have to pay any taxes.
Seek Professional Tax Advice
DIY tax software can make filing your own tax return a very efficient process, but it still might benefit you to consult with a tax professional. “A tax professional can assist in taking advantage of every available deduction and credit to reduce your tax liability,” Freifeld says.
This is especially true if you want to itemize, are self-employed, experienced a major life event this year, or made a lot of investments.
What’s more, a good tax professional, in tandem with a financial advisor, can help you with tax planning strategies moving forward as well as provide ongoing personalized advice as your financial situation evolves.
To find a reputable tax professional, start by asking friends, family, and colleagues for referrals. You can also ask or search in online community groups if you’re new to an area. Once you have a few names, get on the phone to ask any questions you may have, but also to get a feel for the person’s demeanor. You want to work with someone who is a good fit for you. You can also try searching the tax professional online to check out their website, read customer reviews, and other information about them.
The Bottom Line
You work hard for the money, so you may as well try to keep as much of it as legally possible. Understanding how taxes work, using the rules to your advantage, and consulting with tax professionals can help you maximize your tax return and develop smart tax planning strategies.
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