6 Reasons Your Tax Refund Will Be Higher in 2025
6 Reasons Your Tax Refund Will Be Higher in 2025
Jordan Rosenfeld Thu, December 12, 2024 GOBankingRates
Tax refunds can feel like the reward for the hassle of filing your taxes, but many Americans forget that this is not extra money coming back to you, but your own money that, in essence, you overpaid (or under-deducted) to the government. A big tax refund might actually be a sign of financial changes you need to make with your accountant, but who doesn’t like getting money back instead of paying it out?
According to Alex Freund, a financial advisor and owner of Freund & Smith Advisors, a Northwestern Mutual firm, here are six reasons why your tax refund could be higher in 2025.
If You Earned the Same (or Less) Income as Last Year
A common reason you might wind up with more money back in 2025 is if you earned the same, or even less, income because there are inflationary adjustments that occur to the tax rates, brackets and deductions, Freund explained.
“Almost everything in the tax code is stipulated and scheduled to increase on an annual basis with inflation,” Freund said.
If you don’t make any more income in 2025 compared to 2024, you’ll actually pay less in taxes and get a bigger refund “because the deductions are going up by inflation as well as the brackets,” he said.
If You Made Increased Contributions to Retirement Accounts
If you made any increased contributions to tax advantaged retirement accounts, such as a 401(k), which reduce your taxable income now, the taxes on your gains or even later upon withdrawal, such as with a Roth IRA, your refund might be higher. Freund pointed out that the federal government provides these kinds of deductions to “incentivize people to make these contributions so they aren’t broke or asset-less as they get near or into retirement, or be fully reliant on Social Security or government assistance.”
For example, he said, let’s say a couple is in a 22% tax bracket. If you’re married filing jointly, that’s generally taxable income between $100,000 and $200,000, you’re paying about 22 cents on every dollar in taxes. “Well, the same holds true if you put away a dollar into a retirement plan — you’re saving about 22 cents in taxes,” he said.
If You Take Self-Employment Deductions
The self-employed small-business person or independent contractor is entitled to take a variety of deductions for “reasonable and necessary” business expenses and operations, Freund explained. While you want to work with a CPA to make sure you’re doing this correctly, if you had greater expenses or discovered new deductions you’re eligible for, this could reduce your taxable income and potentially see a return to you of more of the taxes you paid to the government.
If You Qualify For Tax Credits
Tax credits are basically “government incentives to do something,” Freund said, and they can reduce your taxable income. “So in this world where we’re trying to become more green, you have tax credits for installing efficient furnaces and air conditioning units and solar panels on your house, efficient washers and dryers, et cetera,” he explained.
TO READ MORE: https://www.yahoo.com/finance/news/6-reasons-tax-refund-higher-160023489.html