7 Key Tax Refund Factors
Getting a big tax refund requires planning and forethought throughout the year. Filing status, dependents and the number of claimed allowances all impact your refund and your budget. A tax or finance professional can make sure you choose the best options and don't overlook any credits or deductions.
1. Gross Annual Income
The amount of tax an individual owes the government each year is 10 to 39.6 percent of his total income. As total earnings increases, the tax rate increases as well. For example, a single filer who made $80,000 in 2015 owed 25 percent of that in taxes, while a person who earned $90,000 owed 28 percent of his income to the government. Total earnings, or gross annual income, refers to all sources of monetary loss or gain, including wages and tips reported on a W-2 or 1099, self-employment income, interest or dividend earnings, and rent, royalties, or other forms of passive income.
2. Federal Taxes Withheld
The federal income taxes deducted from your paycheck are estimated payments toward the total tax you owe each year. Self-employed individuals may choose to make estimated payments directly to the Internal Revenue Service each quarter. These payments are deducted from the total taxes due at the end of the year. Any overpayment results in a tax refund.
3. Personal Allowances
The number of allowances you claim on form W-4 determines how much of your income is withheld for federal taxes, which in turn affects the size of your refund. A taxpayer who claims zero exemptions brings home less money each pay period because a higher rate of federal taxes are withheld. At the end of the year, this person may be entitled to a bigger refund than an individual who claimed two allowances and brought home a bigger paycheck each week.
4. Filing Status
Married couples typically file joint tax returns, but filing separately may increase a household's total refund in certain situations. Separate filers may qualify for deductions and credits that aren't available at their combined income levels, but may lose access to credits designed for joint filers. Medical expenses, travel deductions and self-employment are common reasons why filing separately may be more beneficial than submitting a joint return.
The amount of tax you owe is reduced when children or other qualifying individuals live in your home at least half the year and rely on you for support. In 2015, married and head-of-household filers received a deduction of $3,500 per dependent up to a maximum of five.
6. IRA Contributions
Personal contributions to a qualifying retirement plan reduce the tax you owe and increase your refund. Payments made to an employer-sponsored retirement account may be eligible deductions as well depending on your income and filing status.
7. Credits and Deductions
Credits and deductions are the best way to maximize your refund. In addition to deductions for dependents and IRA contributions that decrease your taxable income, many filers qualify for credits that further reduce the amount of taxes they owe. Credits for home improvements, dependent care and higher education can all increase the refund you receive.
Several key factors influence how much you'll get back if you're eligible for a tax refund. Use the following details to determine how big your refund will be.