Key Takeaways
- To estimate your tax refund, start by calculating your taxable income, which is your gross income minus deductions, and apply your tax bracket to this amount.
- Maximizing your refund can involve strategies like claiming dependents, itemizing deductions, contributing to retirement funds, and applying all available tax credits.
- Tax credits directly reduce your tax liability dollar for dollar and can be refundable or nonrefundable, while deductions reduce taxable income based on your marginal tax rate.
How To Estimate Your Tax Refund
Nearly two-thirds of all tax filers in the United States received a tax refund in 2024 for the 2023 tax year, according to the IRS. Figuring out what you’ll get back on your tax return can help you plan for the impact your refund will have on your personal finances. You can estimate your tax refund easily with a few key pieces of information and a bit of math.
Before diving into the math, it’s important to understand the difference between your tax return and your tax refund. A tax return is the form you file annually that outlines your income, expenses, investments and other tax-related information. The information on your tax return will determine whether you receive a tax refund.
You get a tax refund when you pay more taxes to your state government or the federal government than your actual tax liability. A refund is a check from the government for the amount you overpaid.
The first step in estimating your tax refund is to calculate your taxable income. Taxable income can be calculated as your gross income minus all deductions. There are two types of tax deductions: standard and itemized.
The IRS determines a standard deduction to reduce each taxpayer’s taxable income by a certain amount based on factors like filing status, age and number of dependents. An itemized deduction requires you to keep track of expenses like home mortgage interest and charitable contributions to deduct from your taxable income when you file your return. What’s left after all available deductions is your taxable income.
If you choose an itemized deduction over the standard deduction when you file your federal tax return, you can deduct most state and local taxes, including income, property and real estate taxes. This is known as the SALT (State and Local Tax) deduction, and the total amount that can be deducted is capped at $10,000.
Once you find out your taxable income, the next step to estimating your refund is to apply your tax bracket. Your tax bracket determines what percent of your taxable income the government collects. So if you earn a higher income, you’ll pay a higher percentage of that income in taxes. That progressively increasing percentage is your marginal tax rate.
By applying your marginal tax rate to your taxable income, you can estimate how much tax you owe in that tax year.
Throughout the tax year, most employers withhold some tax from their employees’ paychecks and pay it to the IRS on their employees’ behalf. This is what’s called tax withholding.
If the amount you owe is greater than the amount your employer withheld from your paycheck, you must pay taxes to the IRS. More commonly, though, you’ll end up owing less than the amount withheld, which means the IRS will pay the difference back to you in the form of a tax refund.
Let’s look at an example. Say you’re a single filer who makes $50,000 annually.
- Calculate your taxable income.
- Your taxable income is your gross income of $50,000 minus your deduction. The standard deduction for a single filer in the 2024 tax year is $14,600, which puts your taxable income at $35,400.
- Apply the marginal tax rate.
- For a single filer, your income up to $11,600 is taxed at 10%, which amounts to $1,160 in taxes. The remaining $23,800 is taxed at 12%, which comes to $2,856. Your total tax liability for the 2024 tax year is the sum of those amounts, or $4,016.
- Subtract from withholdings.
- Finally, subtract your tax liability from the amount of tax withheld by your employer. You can find this number on your W-2. Let’s say your employer withheld $6,000 in taxes this year to pay to the IRS on your behalf. Subtract the $4,016 in taxes you owe from the $6,000 withholdings, and you can estimate a refund of about $1,984 for the 2024 tax year.
How Much Will My Tax Refund Be If I Make $50,000?
Looking to see what you might owe?: Find out what Federal tax bracket you’re in
How To Maximize Your Tax Refund
There are several ways you can get a bigger refund on your taxes this year. Here are just a few of the best ways to maximize your refund.
- Claim your dependents.
- Claiming any children or other relatives who rely on you for financial support entitles you to certain deductions and tax credits, such as the child tax credit and the child and dependent care credit. The child tax credit has increased to up to $2,000 per child, so it’s important to claim all your dependents if you want to get the maximum refund.
- Itemize your deductions.
- The standard deduction knocks a decent chunk off of taxable income, and for most taxpayers, it’s the better deal. But it’s worth looking into whether an itemized deduction, where you deduct individually for items like charitable contributions or medical expenses, could save you more money than opting for the simpler standard deduction.
- Contribute to retirement funds.
- If you contribute to a 401(k) or a traditional IRA, maxing out your contributions can help you save on your tax return. Traditional IRA and 401(k) contributions are deducted from your taxable income, so you won’t have to pay taxes on the money you put in those accounts. Remember, you can still contribute to an IRA for 2024 through April 15.
- Harvest tax losses.
- You can turn lost value on investments into a lower tax bill through a process called tax-loss harvesting. With this strategy, you can sell investments, such as mutual funds, that have lost value over the year and purchase substantially similar investments to replace them. You end up realizing a loss for tax purposes, but your investment may in fact gain value depending on how the replacement fund performs over the year. Tax-loss harvesting lets you report losses to offset the investment gains you may owe taxes on, resulting in a lower investment income tax liability.
- Apply all available credits.
- Aside from credits for claiming dependents, there are other less common credits you may qualify for. If you’ve made home improvements aimed at reducing your carbon footprint, you may be eligible for the residential energy property credit. Workers with low to moderate income and families may qualify for the earned income tax credit (EITC). And if you or your spouse went back to school this year, you may be able to save some money with the lifetime learning credit.
Top 5 Tips to Get Your Maximum Tax Refund
Figuring out how to maximize your refund can involve some pretty in-depth knowledge. If the process seems a bit overwhelming, talking to a CPA or tax professional can help make sure you don’t miss anything.
New to investing? Learn more with our comprehensive guide: Investing for Beginners
How Do Tax Credits Work?
A tax credit is subtracted directly from the amount of tax you owe, so it reduces your total tax liability dollar for dollar, and the value of the credit is the same for everyone who is eligible to receive it. This is different from tax deductions, which subtract from your taxable income.
The value of a tax deduction depends on your marginal tax rate, so the more income you earn, the less a deduction is potentially worth. Here are a few examples of the most common tax credits claimed by taxpayers each year.
- Earned Income Tax Credit (EITC)
- The earned income tax credit helps low- to moderate- income workers and families who meet certain requirements reduce their tax liability.
- Child Tax Credit (CTC)
- You could increase your tax refund by thousands of dollars by claiming the child tax credit for each child you claim as a dependent. If you received an advance payment of part of your 2023 CTC under the American Rescue Plan, you can claim the rest of the CTC when you file your tax return for the 2024 tax year.
- Saver’s Credit
- Putting away money for retirement may entitle you to a “saver’s credit” on your tax return. If you contributed to an IRA this year, the retirement savings contribution credit will reduce your tax liability by between 10% and 50% of the amount of your contributions, depending on your income.
- Education Credits
- The IRS offers credits for qualifying education expenses, such as the American opportunity tax credit (AOTC) and the lifetime learning credit.
Most Common Tax Credits
Most tax credits are nonrefundable, which means that tax credits are subtracted directly from the amount you owe, so they cannot reduce your tax liability below zero. If you are a low-income filer, you may not be able to claim all available tax credits if doing so would reduce your amount owed to below zero.
Not all tax credits are nonrefundable. Some are fully or partially refundable, which means that if their value is more than the filer’s income tax liability, the filer is paid the excess. Examples of refundable tax credits include the earned income tax credit (EITC), which is fully refundable, and the child tax credit (CTC), which can be refunded if the filer’s earnings are greater than the $2,500 threshold.
How Do State and Federal Taxes Affect Your Refund?
In addition to federal income tax, you may also pay state income taxes depending on where you live. You won’t pay state income tax if you live in one of these eight states: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.
New Hampshire doesn’t tax wages, but does tax dividends and interest, though recent legislation has been passed to phase out this tax beginning in 2024.
If you live in one of the other 41 states, you’ll need to file a state tax return in addition to your federal tax return. The IRS website contains a directory to help you find information on your state’s tax requirements.
Key Differences Between State and Federal Taxes
- State tax rates are typically lower than federal tax rates.
- States can have different types of tax credits and deductions.
- The amount of tax withholdings will vary for state and federal taxes.
Related Tax Refund Questions
If you file electronically and opt to receive your refund via direct deposit, you can expect your tax refund to arrive within 21 days of submitting your return. If you send your return by mail, you should receive a refund in six to eight weeks from when the IRS receives your return.
The child tax credit is worth up to $2,000 per child for the 2024 tax year.
Although owing back taxes or having a tax lien placed on you no longer shows up on credit reports or affects your credit score, there are still ways mortgage lenders can check whether you owe taxes. When you are trying to buy a house, your lender can find out whether you have a tax lien filed against you or have unpaid taxes by conducting a search through public records.
Even if you can’t pay your taxes, you should still file a tax return to avoid a steep penalty from the IRS. You can apply online for payment plans through the IRS to pay off your balance over time. You may also be able to negotiate an offer in compromise with the help of a tax attorney.
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