No one wants to pay the government more than they have to.
- The latest IRS data shows that average tax refunds are down 11% from this time last year.
- Tax refunds are money that should have belonged to you anyway.
- Adjusting your tax withholding can ensure the government doesn’t take more from your paychecks than it should.
For most people, getting a tax refund is the big reward for filing your taxes, but those expecting to rake in enough money to cover their expenses for a month or two might be disappointed this year. So far, tax refunds are down 11% compared to this time in 2022.
That may be disappointing for a lot of people, but the truth is, it’s actually good news. Here’s why.
What smaller tax refunds actually mean
Your tax refund is money that rightfully belonged to you that the government withheld during 2022. It essentially took hold of that money as an interest-free loan until you filed your tax return, showing how much you actually owed for the year.
A large refund means the government withheld a lot more from you than it should have. Had you received that money as part of your 2022 paychecks, you could’ve made better use of it. You might have been able to spend it on something you enjoy, reach your savings goals more quickly, or invest it to help your money grow more quickly over time.
Getting a smaller refund means the government withheld an amount that was much closer to your actual tax liability during 2022. So rather than getting your money in a lump sum as a tax refund, you got it added to each paycheck throughout the year.
How to hold onto as much of your savings as possible
Many people still like the idea of receiving a tax refund, though, and everyone wants to pay as little in taxes as possible. Here are some tips you can try to hold onto as much of your hard-earned cash as you can.
Adjust your tax withholding
When you filled out your employment paperwork at your job, one of the documents you completed indicated how much you wanted the government to withhold from each paycheck for taxes. If you feel the government is withholding too much, you can always update your withholding by filling out a new form and filing it with your employer. Talk to your HR department to learn how to do this.
The IRS has a tax withholding estimator tool to help you determine if you’re withholding an adequate amount from each check or not. You don’t want to reduce your withholdings too much, though, or you could wind up with a tax bill at the end of the year.
Claim all tax breaks you qualify for
There are two types of tax breaks you could earn: tax deductions and tax credits. Tax deductions reduce your taxable income for the year. For example, if you earned $50,000 and qualified for a $1,000 tax deduction, you’d only pay taxes on $49,000 that year. Tax credits are a dollar-for-dollar reduction of your tax bill.
It’d be impossible to list all tax deductions and credits here, but some of the most common include:
- Tax deductions for tax-deferred retirement contributions
- Tax deductions for health savings account (HSA) contributions
- Tax deductions for charitable donations
- Earned Income Tax Credit
- Child Tax Credit
- American Opportunity Tax Credit
Your tax software or tax professional should be able to help you find all the tax breaks you qualify for. Just know that you’ll need documentation to back up each one. Otherwise, the IRS could disallow these tax breaks if it audits you.
Itemize deductions if that makes sense for you
It makes sense for most people to choose the standard deduction. This is a predetermined amount of income you won’t pay taxes on, and it varies depending on your age and tax-filing status. But sometimes, it can be advantageous to itemize deductions instead.
Certain tax deductions, like deductions for large medical expenses, are only available if you itemize your deductions. Your tax software or tax professional should also help you work out which strategy will give you the most money overall.
Your financial situation can change over time, and that can affect the factors above. So be sure to review these things each year before filing your taxes to ensure you’re giving the government only as much as you have to.
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