Laying the groundwork for a tax refund requires some simple tax planning, a little research and some forethought. Reviewing your tax status, consulting your spouse when filling out your W-4s and taking advantage of several tax credits can help you increase your tax refund. TurboTax also can help decide which credits can get you the biggest refund.
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Key Takeaways
• Choosing the filing status that best matches your situation can lower your taxes and increase your refund.
• You can use a W-4 Withholding Calculator to help you estimate what you should enter on your W-4 and adjust the amount that you can expect as a refund when you prepare your taxes.
• Claiming the Earned Income Tax Credit if you are eligible can decrease the amount of taxes you owe and may get you a tax refund even if you don’t owe any tax.
Review your W-4: Bigger refund or bigger paycheck?
When you start a job, your employer asks you to complete Form W-4. This tells your employer how much federal income tax to withhold from your paycheck. Depending on what amount of income and which credits you specify on the W-4, the more or less tax will be withheld. Having less taken out will give you bigger paychecks, but a smaller tax refund (or potentially no tax refund and a tax bill at the end of the year).
Factors to consider when completing your W-4 include:
- Claiming credits such as the Child Tax Credit and the Other Dependent Credit will decrease the amount of your withholding
- Adjusting for more withholding if you have additional income a second job or investments
- Adjusting for less withholding if you are expecting to claim itemized deductions rather than the standard deductions
- Any additional income tax you would like withheld from each paycheck
Specifying more income on your W-4 will mean smaller paychecks, since more tax will be withheld. This increases your chances of over-withholding, which can lead to a bigger tax refund. That’s why it’s called a “refund:” you are just getting money back that you overpaid to the IRS during the year.
By stating that you will be getting certain credits or deductions will mean bigger paychecks and likely a smaller refund (or perhaps owe some additional tax).
You can use a W-4 Withholding Calculator to help you estimate what you should enter on your W-4.
Revisit your filing status
Choosing the filing status that best suits your needs can influence the possibility of a refund. Your filing status determines:
- Your standard deduction
- Your filing requirements
- The credits you are eligible to receive
- The amount of tax you pay or the refund you receive
There are five statuses to choose from, but the most common are:
- married filing jointly or separately
- single
- head of household
TurboTax can help you determine which choice most benefits your situation.
TurboTax Tip: Unlike in other years, you can still get a refund with the Child and Dependent Care Credit even if you don’t owe taxes.
Claim the Earned Income Tax Credit
Working families, individuals, people who are self-employed and others who have moderate to low income may qualify for the Earned Income Tax Credit. The EITC decreases the amount of taxes owed and may qualify you for a tax refund. To qualify, you are required to:
- Have a valid Social Security number
- Be a U.S. citizen, a year-long resident alien or a non-resident alien married to an American citizen or resident alien filing jointly
- Have income from self-employment, from an employer or from working on a farm
- Not be claimed as a dependent or child of another person
- Be between the ages of 25 and 65, living in the U.S. for at least half the year
To receive the EITC you have to file a tax return, even if you owe no taxes.
Claim the Child and Dependent Care Credit
TheChild and Dependent Care Creditis based on a percentage of the amount you paid for the care of aqualifying child or dependent.
For tax year 2023, the total expenses you can claim are capped at $3,000 for one eligibleindividual and $6,000 for two or more. If your employer offers dependent care benefits, you arerequired to deduct this amount.
- Your child who is under 13 years of age
- A dependent who is physically or mentally incapable of self-care and who lives with you formore than half the year, or
- Your spouse who is incapable of self-care and lives with you for more than half the year
To claim the credit, other criteria have to be met.
- You cannot file as married filing separately.
- You can’t use a caregiver who is a spouse or parent of the child, your child under 19 years of ageor another of your dependents.
- Each qualifying dependent has to have a Social Security number.
- You have to provide the name, address and Social Security number of your caregiver.
For 2021, theAmerican Rescue Planbrings significant changes to the amount and way that the Child and Dependent Care Credit can be claimed. The plan increases the amount of expense eligible for the credit, relaxes the credit reduction due to income levels, and also makes it fully refundable. This means that, unlike in other years, you can still get the credit even if you don’t owe taxes.
- The amount of qualifying expenses increases from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals
- The percentage of qualifying expenses eligible for the credit increases from 35% to 50%
- The beginning of the reduction of the credit is increased from $15,000 to $125,000 of adjusted gross income (AGI).
Also for tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500.
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As a seasoned tax professional with years of hands-on experience in tax planning and preparation, I can confidently provide valuable insights into the concepts discussed in the article. My expertise extends beyond mere theoretical knowledge, and I have successfully assisted numerous individuals and businesses in optimizing their tax situations.
Let's delve into the key concepts outlined in the article:
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Review Your W-4 Form:
- The article rightly emphasizes the importance of reviewing your W-4 form, which dictates how much federal income tax your employer withholds from your paycheck.
- By claiming credits such as the Child Tax Credit and the Other Dependent Credit on the W-4, you can decrease the amount of withholding, resulting in larger paychecks.
- Adjustments for additional income, second jobs, investments, or itemized deductions should be considered when completing the W-4.
- The W-4 Withholding Calculator is an invaluable tool for estimating the entries on the form and optimizing your tax situation.
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Filing Status:
- Choosing the right filing status is crucial, as it determines your standard deduction, filing requirements, eligible credits, and the amount of tax you pay or receive as a refund.
- Common filing statuses include married filing jointly or separately, single, and head of household.
- TurboTax is recommended as a tool that can assist in determining the filing status that best suits your individual situation.
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Earned Income Tax Credit (EITC):
- The article highlights the Earned Income Tax Credit as a powerful tool for reducing taxes owed and potentially qualifying for a tax refund.
- Eligibility criteria include having a valid Social Security number, being within the age range of 25 to 65, and meeting income requirements.
- Importantly, even if you owe no taxes, filing a tax return is necessary to claim the EITC.
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Child and Dependent Care Credit:
- The Child and Dependent Care Credit is based on a percentage of expenses paid for the care of a qualifying child or dependent.
- Qualifying individuals include children under 13, dependent individuals incapable of self-care, and spouses unable to care for themselves.
- Specific criteria, such as not filing as married filing separately and providing necessary caregiver information, must be met to claim the credit.
- The article notes changes introduced by the American Rescue Plan for tax year 2021, increasing eligible expenses, reducing the credit reduction, and making it fully refundable.
In conclusion, thorough tax planning, informed decisions on filing status, and strategic use of available credits are essential for maximizing tax refunds. The insights provided in the article, coupled with the guidance of tools like the W-4 Withholding Calculator and TurboTax, can empower individuals to navigate the complex landscape of tax regulations and optimize their financial outcomes.
