Tax refunds often feel like a financial windfall, but it’s important to remember that they represent money you overpaid to the government throughout the year. Still, there’s no denying the satisfaction of receiving a bigger refund when tax season rolls around. Financial advisor Alex Freund explains six key reasons why your tax refund could be higher in 2025—and why planning can help you maximize this benefit.
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1. Your Income Stayed the Same or Decreased
If your income remains unchanged or even drops slightly in 2025, you could see a larger refund thanks to inflation adjustments. Tax rates, brackets, and deductions typically rise with inflation each year.
Freund explains:
“Almost everything in the tax code is scheduled to increase annually with inflation. If your income doesn’t grow, you’ll pay less in taxes because deductions and brackets adjust upward.”
This automatic adjustment can leave you with more money refunded at tax time.
2. You Increased Contributions to Retirement Accounts
Making larger contributions to tax-advantaged retirement accounts like a 401(k) or IRA reduces your taxable income. As a result, you’ll owe less in taxes and may qualify for a bigger refund.
For example, if you contribute $1,000 to your retirement plan and are in the 22% tax bracket, you’ll save $220 in taxes. Freund notes that the government encourages these contributions to help Americans build savings for retirement instead of relying solely on Social Security.
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3. You Claimed Self-Employment Deductions
If you’re self-employed or an independent contractor, you can take advantage of a wide range of deductions for business expenses. This includes costs like:
- Home office expenses
- Equipment and software purchases
- Travel, meals, and marketing costs
If you had higher expenses this year or discovered new deductions, you could significantly lower your taxable income. A qualified CPA can help ensure you claim everything you’re eligible for.
4. You Qualified for Valuable Tax Credits
Tax credits are designed to incentivize specific behaviors and provide relief to taxpayers. Unlike deductions, which reduce your taxable income, tax credits directly reduce your tax bill.
Some popular credits include:
- Energy-efficient home improvements: Credits for installing solar panels, efficient HVAC systems, or appliances.
- Earned Income Tax Credit (EITC): A benefit for low- to moderate-income earners.
- Education credits: Help offset tuition or student loan interest.
If you’re eligible for any of these credits, they can lead to a substantial refund.
5. You Made Charitable Contributions
Donating to charity can also boost your refund if you itemize your deductions. This includes cash donations or “in-kind” contributions like clothing, household items, or even stocks.
Freund explains:
“This is most relevant if you file a Schedule A for itemized deductions, typically when you own a home or have significant medical expenses.”
If you’ve been charitable throughout the year, ensure you keep records of your donations to maximize this deduction.
6. You Lost Money on Investments (Tax Loss Harvesting)
If you lost money in taxable investment accounts (not retirement accounts), you can use those losses to offset gains and reduce your tax bill—a strategy known as tax loss harvesting.
Here’s how it works:
- Sell investments that have lost value to claim the losses.
- Use the losses to offset capital gains from other investments.
- If your losses exceed your gains, you can deduct up to $3,000 against regular income.
This approach lowers your taxable income and may boost your refund.
Why a Bigger Refund Isn’t Always Good News
While a higher refund can feel like a win, Freund reminds taxpayers that it often means you’ve overpaid throughout the year.
“What you’ve done is given the government a six- to 12-month interest-free loan,” Freund said. In a high-interest environment, that money could earn you significant returns in a high-yield savings account or CD, instead of sitting with the government.
However, Freund acknowledges that many people use refunds as “forced savings” to avoid spending extra cash during the year. If you use your refund to meet financial goals—like funding an IRA, paying off debt, or saving for your child’s education—this approach can still work to your advantage.
Don’t Wait Until December to Plan
Instead of scrambling for deductions at the end of the year, meet with a CPA or financial advisor regularly throughout the year. Strategic tax planning can help you:
- Reduce your tax burden
- Maximize deductions and credits
- Align your taxes with your overall financial goals
By being proactive, you’ll be better prepared for tax season and might enjoy a bigger, well-planned refund.
Final Thoughts
Whether you’re saving more for retirement, taking advantage of tax credits, or managing investments, there are several ways your tax refund could grow in 2025. While getting a refund feels great, it’s also a sign to review your finances and ensure your money is working smarter for you.
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