What comes to mind when you think about filing taxes? Apart from saving the date on upcoming filing deadlines, you may wonder what you can do right now to increase your tax refund.
What if there’s nothing you can do for a bigger tax refund? Try not to silently panic if you just read this sentence, as it’s meant to encourage taxpayers to change their thinking. GOBankingRates spoke to Christopher Jervis, enrolled agent and president of Lone Wolf Financial Services LLC, about why taxpayers should try to reduce their tax liability.
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Why Shouldn’t I Try To Increase My Tax Refund?
Before listing out strategies to reduce one’s tax liability, here’s a step back to the topic of opting for a smaller tax refund, or even none at all. Why is it a bad thing to try to increase your refund?
“A tax refund is just your change from paying your tax bill,” said Jervis. “If you are getting larger and larger refunds, that means you are paying more than you need to.”
At the basic level, Jervis said those who paid too much in taxes get back the overage as their change. This is typically done by making estimated tax payments or by having the taxes held out of each paycheck. Those who didn’t pay enough in taxes owe the difference.
“We encourage taxpayers to get as close to zero as possible, with no large refund and no large balance due,” said Jervis.
Related: The 7 Worst Things You Can Do If You Owe the IRS
Tips for Reducing Tax Liability
Now that you understand what a tax refund is and why it’s important to keep a tax bill as low as possible, follow these helpful strategies to reduce your tax liability.
Fund a Traditional IRA
If you qualify, Jervis recommends funding a traditional IRA by April 15, 2024. Those who do so can take the deduction on their 2023 taxes. Jervis said you can even file before funding the account and use the refund, which includes this deduction, to fund the IRA.
Keep in mind, however, that to save money, you’ll need to spend your own money.
“If you make a $6,000 contribution to your traditional IRA, you might receive an additional $1,320 in your refund, assuming a 22% tax bracket,” said Jervis. “But you must spend $6,000 out of your pocket to increase that refund by $1,320; you have $4,680 less in spendable cash than you did before.”
Take Advantage of Your Employer’s Pre-Tax Benefits
Some of these may include a 401(k) plan and a Health Savings Account (HSA), which can reduce the amount of income that is subject to tax.