As tax season approaches, many people are eagerly awaiting their tax refund. However, the refund amount you receive is not arbitrary but determined by various factors.
Understanding what affects your tax refund can help you plan your finances better and ensure that you get the most out of your tax return.
If you use professional tax preparation services, you can expect a better tax refund than if you were to do it yourself.
Here are the main things that affect tax refunds.
Filing Status
Your filing status is a significant factor that can affect your tax refund. It determines your tax rate, tax deductions, and credits. The following are the five filing statuses:
- Single: This applies if you are unmarried, divorced, or legally separated under state law, and you don’t qualify for another filing status.
- Married filing jointly: This applies if you are married and file a joint tax return with your spouse. You must report all your combined income, deductions, and credits on the same return.
- Married filing separately: This applies if you are married but choose to file separate tax returns. Each spouse reports their own income, deductions, and credits on their return.
- Head of household: This applies if you are unmarried and pay more than half the cost of maintaining a household for yourself and a qualifying person.
- Qualifying widow(er) with dependent child: This applies if your spouse died in one of the two previous tax years, and you have a dependent child.
Income Level
Your income level plays a critical role in determining your tax refund. The more income you earn, the higher your tax rate, and the less refund you will receive. However, the income level alone doesn’t determine your tax refund, as there are deductions and credits that can help you reduce your taxable income.
Deductions
Deductions can lower your taxable income and increase your refund amount. There are two types of deductions:
- Standard deduction: This is a fixed amount that varies based on your filing status. The standard deduction reduces your taxable income by a set amount, without the need for documentation.
- Itemized deductions: Itemized deductions are based on your actual expenses, such as mortgage interest, property taxes, and charitable donations. You can claim either the standard deduction or itemized deductions, whichever is higher. However, you need to keep receipts and documentation to support your itemized deductions.
Tax Credits
Tax credits are dollar-for-dollar reductions in your tax liability. These credits are more beneficial than deductions because they directly reduce the amount of federal taxes you owe. Here are some common tax credits:
- Child tax credit: This is a credit of up to $3,600 per child under age 6 and up to $3,000 per child between ages 6 and 17. To qualify, the child must be a U.S. citizen or resident, and you must have provided more than half of their support during the tax year.
- Earned Income Tax Credit (EITC): This is a credit for low- to moderate-income workers. To qualify, you must have earned income and meet certain income limits. The credit amount depends on your income, filing status, and number of qualifying children.
- American Opportunity Tax Credit: This is a credit of up to $2,500 per eligible student for their first four years of post-secondary education. To qualify, the student must be enrolled in a degree or certificate program and meet certain other requirements.
- Lifetime Learning Credit: This is a credit of up to $2,000 per tax return for post-secondary education expenses. Unlike the American Opportunity Tax Credit, there is no limit on the number of years you can claim this credit.
- Retirement Savings Contributions Credit: This is a credit of up to $1,000 for individuals who make eligible contributions to a retirement plan. The credit amount depends on your income and filing status.
- Solar Tax Credit: Because solar is a renewable resource, the government provides incentives for going solar, which include tax credits. Learn more here.
Tax Withholding
Tax withholding is the amount of tax that your employer withholds from your paycheck throughout the year. If your employer withholds more than the amount of tax you owe, you will receive a refund. If they withhold less, you will owe taxes when you file your return.
It’s important to review your tax withholding periodically to ensure that you are having enough tax withheld from your paycheck. This can help you avoid owing taxes and penalties when you file your return.
Timing of Filing
The timing of your tax return filing can also affect your refund amount. The earlier you file your return, the earlier you can receive your refund. However, if you file too early, you may not have all the necessary documentation to claim all the deductions and credits you are entitled to. Additionally, if you owe taxes, filing early will require you to pay any taxes due sooner.
Errors and Omissions
Errors and omissions on your tax return can delay the processing of your return and affect your refund amount. It’s important to review your return carefully for accuracy and completeness before submitting it to the IRS. Common errors include math mistakes, misspelled names, incorrect social security numbers, and missing signatures.
Conclusion
In conclusion, understanding what affects your tax refund can help you plan your finances better and ensure that you get the most out of your tax return. Your filing status, income level, deductions, tax credits, tax withholding, timing of filing, and errors and omissions can all impact your refund amount. It’s essential to consult with a tax professional if you have questions or need assistance with your tax return. By taking the necessary steps, you can maximize your refund and avoid penalties and interest from the IRS.
