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Posted by Dennis Jao

Ways to Boost Your Tax Refund

Ways to Boost Your Tax Refund


A tax refund is a big deal. Tax season is a time to expect extra money from old Uncle Sam if you're like many people. But could you have a lower tax refund than expected?

If you're wondering, "Why is my tax refund so low?" There is a reason for this. This is a combination of several changes that will affect overall results, including the tax impact of the coronavirus pandemic. Read on as we take a look at possible reasons why your tax refund might be so low in the 2021 tax year.


Why is my tax refund so low in 2021?

If you're wondering, "Why is my tax refund so low in 2021?" you are not alone. Many taxpayers filing their 2021 tax returns are asking themselves the same question. So, if your tax refund is lower than expected in the 2021 tax year, there could be several reasons:

  • You did not withhold your unemployment benefits: The unemployment rate has skyrocketed in the United States, with millions of Americans filing for unemployment benefits. Many people don't realize that unemployment income is taxable and don't keep enough (or any) unemployment benefits. The new American Rescue Plan Act excludes $10,200 of unemployment income earned. The exclusion might reduce your taxable income and give you a higher refund if you receive unemployment benefits. 

  • You have worked fewer hours or have interruptions in your work: even if you were not laid off in 2021, many companies have decided to reduce their hours. This can affect your refund between tax years, even if you work in the same job. If so, you have less withholding tax, so less to recover in reimbursement in the 2021 tax year.

  • No Estimated Taxes on Gig Earnings: Gig employment is on the rise due to more freelance opportunities. But not all gig workers know that they must pay the estimated taxes on this type of income. If a gig worker misses this step, it could result in an unexpected tax bill or a reduced refund. 

  • Not Accounting for Withholding across Multiple Jobs: Each job you have will need to complete a separate W-4 form. If you don't account for all the work on the W-4 forms, you may not have enough withholding, so your tax refund may be lower than expected.

  • Ignoring changes in eligibility for tax credits and deductions: there may be other effects on your refund due to the credits you may get. For example, if you took advantage of the rules that allowed student loan repayments to be suspended, it may have resulted in a reduction in the interest rate on student loans. Or, if you didn't pay child care because your children stayed home due to covid, your eligibility for the comprehensive child care credit may have changed.


Ways to Boost Your Tax Refund You Never Thought About

Review your W-4: Higher Reimbursement or Higher Salary?

When you start a new job, your employer will ask you to complete Form W-4. This tells the employer the amount of federal income tax that must be withheld from the paycheck. Depending on the amount of income and credits specified in W-4, more or less tax will be withheld. If you take less, you'll get a higher salary but a lower tax refund (or a tax bill at the end of the year or maybe no tax refund).

Some characteristics to consider when completing your W-4 include:

  • Adjust to increase withholding if you have extra income, a second job, or an investment

  • Adjustment to reduce withholding tax if you intend to claim itemized deductions rather than standard deductions

  • Applying for loans, such as the Child Tax Credit and the Other Employees Credit, will reduce the amount of tax withheld.

  • Any additional income tax you wish to withhold from any wages

Specifying higher income on the W-4 means lower wages because more taxes will be withheld. This increases the risk of over-withholding tax, which may result in a higher tax refund. That's why it's called a "refund" – you are just getting your money back that you overpaid to the IRS during the year.

Claiming that you will receive certain credits or deductions means higher wages and likely lower refunds (or you may owe some additional tax).


Check your Filing Status.

Choosing the exact filing status that best suits your needs may affect your ability to get a refund. Your filing status determines:

  • Credits to which you are eligible to receive

  • The amount of tax you pay or refund you receive

  • Your filing requirements

  • Your standard deduction

There are five filing statuses to choose from:

  • Married filing jointly

  • Married filing separately

  • Head of household

  • Single

  • Widow(er)

Claiming the Earned Income Tax Credit (EITC)

Working families, individuals, the self-employed, and other middle to low-income earners are eligible for the earned income tax credit. The earned income tax credit lowers the amount of tax you owe and may entitle you to a tax refund. To qualify, you must:

  • Have a valid social security number

  • Be a U.S. citizen, one-year resident alien, or a nonresident alien married to a U.S. citizen or resident alien filing jointly.

  • Have income from self-employment, an employer, or working on a farm

  • Not be claimed as a dependent or child of another.

  • Have a qualifying child and be between the ages of 25 and 65 and live in the United States for at least six months to be eligible.

To receive the EITC, you must file a tax return, even if it is not due for tax purposes.


Include the child and dependent care credit

The child and the dependent care credit is based on a percentage of the amount paid for the care of an eligible child or dependent.

For 2020, the total expenses you can claim up to $4000 for one eligible person and $8,000 for two or more qualifying persons. If your employer provides dependent care benefits, you must deduct this amount.

As of 2021, the American Rescue Plan made significant changes to how much and how you can claim the Child Care and Dependent Care Tax Credit. The plan increases the number of expenses eligible for the credit, makes the reduction in credit more flexible according to income levels, and also makes it fully reimbursable. This means that, unlike other years, you can get credit even if you don't owe tax.

For the 2021 tax year:

  • The percentage of eligible credit increases from 35% to 50%

  • The beginning of credit reduction increased from $15,000 to $125,000 of Adjusted Gross Income (AGI).

Additionally, for the fiscal year 2021, the maximum amount that can be contributed to an Employee Flexible Spending Account and the amount of tax-exempt employee care benefits offered by the employer was increased from $5,000 to $10,500.

A qualifying individual is:

  • A dependent who is mentally or physically unable to care for his or herself and who has lived with you for more than six months, or

  • Your child who is under 13 years old

  • Your spouse who cannot take care of themselves and has been living with you for more than six months

To apply for the credit, other criteria must be met.

  • If you are married, you must file a joint return.

  • Each child and qualifying dependent must have an additional social security number.

  • You cannot use a caregiver who is the spouse or parent of the child, your child under 19, or another dependent.

  • You must provide your caregiver's name, address, and social security number.


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Dennis Jao
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