The latest tax season is in full swing, and so far, early tax return data shows that refund amounts are up slightly from last year. The IRS says the average refund is $3,207 — a 2.1% increase from last year.
With the cost of nearly everything higher these days, Americans will likely be happy that their refunds are larger this year. However, it’s worth pointing out that when you get a tax refund, it usually means you’ve overpaid the IRS, leaving you with less of your hard-earned income throughout the year.
Here’s why your refund could be higher this year and a few things you can do to maximize your refund.
Why some refunds will be higher this year
Inflation has wreaked havoc on many people’s finances over the past two years, and the IRS made some adjustments in response. The result is that if you made the same amount in 2023 as you did in 2022, you might get a larger refund this year. Here’s why:
- The standard deduction is larger: Nearly 90% of taxpayers claim the standard deduction instead of itemizing their directions. The good news for all these tax filers is that the standard deduction increased by 7% for the 2023 filing year. For single taxpayers, the standard deduction is $13,850, and for married taxpayers filing jointly it’s $27,700.
- Tax brackets were increased: The IRS always makes inflation-adjusted changes to tax brackets, but for 2023, it increased the tax brackets by an unusually high 7%.
These two changes will have the most significant impact on American taxpayers’ potential refunds. The good news is that the IRS says 9 out of 10 refunds will be issued within 21 days, so you probably won’t have to wait long after you file.
Three simple ways to maximize your refund
If you want to ensure your tax refund is as high as possible, you can still maximize your chances of getting more money back. Here are a few suggestions.
1. Do your own taxes
Technically, doing your own taxes won’t boost your refund. But if you do get money back from the IRS, you’ll likely be able to keep more of it if you do your own taxes rather than pay a professional tax preparer.
I’m self-employed and have paid people to do my taxes and done them plenty of times myself. Tax prep software has become so easy to use and relatively inexpensive that I can’t imagine paying anyone to do it for me now. Some tax professionals charge between $100 to $200 per hour, on top of standard fees, which isn’t worth it to me. There are even some free tax prep software options out there that won’t cost you a dime.
I recently logged into TurboTax to start my return, which gave me an estimated time of less than two hours to complete. I’ll save hundreds of dollars doing it myself, and if you have a job that sends you a W-2, you’ll likely be able to finish yours relatively quickly as well.
Of course, hiring a tax professional can be a good option if you have multiple income streams, earn a significant portion of your income from investments, or have a self-employed job with lots of clients and deductions.
2. Contribute to your traditional IRA
If you have a traditional IRA, your contributions reduce the amount of your annual taxable income. This tax advantage works in your favor if you’re trying to lower the taxable income amount and maximize your potential refund.
For 2023, you can contribute up to $6,500 to your IRA or $7,500 if you’re older than 50. And even though we’re already in 2024, you can still contribute to your IRA for the 2023 year until April 15, 2024.
This means that if you want to lower your taxable income — and potentially increase your refund — there is still time to contribute to your traditional IRA to help make it happen. For example, if you’re in the 22% tax bracket and contribute the full $6,500 to your IRA account, you could receive a tax deduction of up to $1,430.
3. Consider itemizing deductions
While about 90% of taxpayers use the standard deduction, it may not be the right choice for everyone. The IRS says you should itemize deductions if the total amount of your allowable itemized deductions is greater than the standard deduction.
Some common itemized deductions are charitable donations, home mortgage interest, state and local income taxes (up to $10,000), and medical and dental expenses that are more than 7.5% of your adjusted gross income.
Everyone’s tax situation is different, so if you’re using tax prep software, take a little extra time and try itemizing deductions to see if it’s worth it. Most tax software programs will ask you a few questions to determine quickly whether itemizing deductions is better than taking the standard deduction.
If you are still deciding whether to hire a professional or work on your taxes yourself, consider filing an extension using IRS Form 4868. That way, you’ll ensure you have all the proper documents and have chosen the right way to file without missing the IRS deadline.
While it may seem like good news that refunds are slightly higher this tax season, it’s important to remember that it means Americans have essentially given the government an interest-free loan throughout the year. Using some of the ways mentioned above to maximize your refund can help ensure you minimize the amount you overpay to the IRS and keep more of your hard-earned money.
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