What determines the size of your tax refund

Your refund is the difference between what you paid in taxes during the year and what you actually owed. The larger that gap, the larger your refund. You create that gap in two ways: by having taxes withheld from your paychecks, and by claiming deductions and credits that reduce the tax you owe.

Most people focus on the withholding side — they adjust their W-4 form to have more money taken out, then get it back as a refund. But that is borrowing from yourself interest-free. The real money comes from deductions and credits you may not know about, or from fixing mistakes on your return that cost you thousands.

The IRS does not tell you which deductions apply to your situation. You have to find them, document them, and claim them yourself. A missed deduction is money left on the table.

Key Takeaways

  • Your refund grows when you claim deductions and tax credits you are may have access to to, not by having more withheld from your paycheck.
  • The Earned Income Tax Credit (EITC) and Child Tax Credit are the largest refunds available, but you must claim them on your return.
  • Common deductions people miss include student loan interest, educator expenses, and charitable donations — each worth hundreds to thousands depending on your situation.
  • Itemizing deductions instead of taking the standard deduction can nearly double your refund if you own a home, pay property taxes, or have high medical expenses.
  • Tax software and free filing services often miss deductions that a tax preparer or accountant would catch, especially if you are self-employed or have investment income.

Refundable tax credits that pay you money

A tax credit is worth more than a deduction because it reduces your tax dollar-for-dollar, and some credits are refundable — meaning if the credit is larger than the tax you owe, the IRS sends you the difference. These are the closest thing to assistance programs in the tax code.

The Earned Income Tax Credit (EITC) is the largest refundable credit. If you earned under roughly $60,000 (the limit varies by filing status and number of children), you may receive between $600 and $3,700 back, even if you owe no tax at all. You must claim it on your return; the IRS will not send it to you automatically. Many people who may have access to never file because they think they earn too little, and they miss thousands in refunds.

The Child Tax Credit is $2,000 per child under 17, and part of it is refundable — up to $1,700 per child comes back to you as a refund. The American Opportunity Tax Credit for education expenses is up to $2,500 per student, with up to $1,000 refundable. If you paid for college tuition, books, or fees, you likely may have access to.

These credits require documentation: proof of income for EITC, birth certificates or Social Security numbers for child credits, and tuition statements for education credits. Have these ready before you file.

Deductions that reduce what you owe

A deduction lowers your taxable income, which lowers your tax bill. The size of the refund depends on your tax bracket — a $1,000 deduction is worth roughly $120 to $370 in refund, depending on your income level.

You can take the standard deduction (a flat amount based on your filing status — roughly $13,850 for single filers and $27,700 for married couples filing jointly in 2024) or itemize your deductions if they add up to more. Itemizing requires tracking and documenting each deduction, but it can nearly double your refund if you own a home or have high medical bills.

Common deductions people miss include: student loan interest (up to $2,500 per year), educator classroom expenses (up to $300 if you teach), self-employment tax (half of what you pay in self-employment tax is deductible), and charitable donations (if you itemize). Homeowners can deduct mortgage interest and property taxes. If you had significant medical expenses, those can be deducted if they exceed 7.5% of your income.

The catch is that you must have receipts, statements, or documentation. The IRS does not require you to submit them with your return, but you must keep them for at least three years in case of an audit. Digital records, bank statements, and charity receipts all count.

When to itemize instead of taking the standard deduction

Itemizing makes sense only if your deductions add up to more than the standard deduction. For most people, it does not. But if you own a home, pay high property taxes, live in a state with high income tax, or had a major medical event, itemizing can be worth thousands.

Add up: mortgage interest paid, property taxes paid, state and local income taxes paid (capped at $10,000), medical expenses over 7.5% of your income, and charitable donations. If that total exceeds the standard deduction for your filing status, itemize. If not, take the standard deduction and move on.

Many tax software programs will calculate both and tell you which is larger. If yours does not, do the math yourself — it takes ten minutes and can be worth hundreds in refund.

Self-employment income and business deductions

If you are self-employed, freelance, or run a side business, you can deduct business expenses — and most self-employed people leave money on the table by not tracking them. You can deduct: home office space (either a flat $5 per square foot or actual expenses), equipment and supplies, vehicle mileage (67.5 cents per mile in 2024, though this changes yearly), meals and entertainment related to business, and professional services like accounting or legal fees.

The key is documentation. Keep receipts, mileage logs, and invoices. The IRS audits self-employed filers at higher rates, so sloppy records invite trouble. If your business is small or new, consider hiring a tax preparer or accountant — they often find deductions that pay for their fee many times over.

You also owe self-employment tax (Social Security and Medicare), which is roughly 15.3% of your net profit. Half of that is deductible, which lowers your taxable income and increases your refund.

Investment income, capital gains, and losses

If you sold stocks, mutual funds, or other investments, you owe tax on the gain — but you can also deduct losses. If you lost money on investments, you can use those losses to offset gains and reduce your tax bill. You can even deduct up to $3,000 in net losses against ordinary income, with any remaining losses carried forward to future years.

This matters because many people sell investments at a loss and never report it, missing a deduction. If you bought a stock for $5,000 and sold it for $3,000, that $2,000 loss reduces your taxable income and increases your refund.

You will receive a 1099 form from your broker showing gains and losses. Match it to your actual transactions and report everything. If your broker's numbers are wrong, correct them on your return and keep your own records as proof.

Tax software versus a tax preparer

Tax software is cheaper and works well for straightforward returns — W-2 income, standard deduction, maybe one or two credits. But software is designed to walk you through questions, not to find deductions you did not know existed. If you miss a deduction, the software will not flag it.

A tax preparer or certified public accountant (CPA) asks about your situation and knows which deductions apply. They catch things software misses: business expenses, investment losses, education credits, dependent care costs, and more. The fee usually ranges from $150 to $500, but if they find even one missed deduction worth $1,000 or more, they pay for themselves.

If you are self-employed, have investment income, own rental property, or had a major life change (marriage, home purchase, job loss), a preparer is worth the cost. If you earned W-2 income only and have no dependents, software is usually fine.

Frequently Asked Questions

Can I get a bigger refund by changing my W-4?

Changing your W-4 to have more withheld will increase your refund, but you are just lending the government your own money interest-free. A better approach is to claim all the deductions and credits you are may have access to to — that actually reduces what you owe and increases your refund without overpaying during the year.

What if I missed a deduction on last year's return?

You can file an amended return (Form 1040-X) for up to three years back. If you missed a $2,000 deduction that would have given you a $400 refund, file the amended return and the IRS will send you that money. There is no penalty for amending to claim a deduction you missed.

Do I have to report investment losses if I did not sell anything?

No. You only report gains and losses when you actually sell. If you own a stock that dropped in value but you did not sell it, there is nothing to report. Once you sell it, report the loss on your return.

Is the Child Tax Credit automatic or do I have to claim it?

You must claim it on your return. The IRS will not send it to you automatically. If you have children under 17 and did not claim the credit, file an amended return to get the money back.

What happens if I claim a deduction I am not sure about?

If the IRS questions it, they will ask for documentation. If you have it, you keep the deduction. If you do not, they disallow it and you owe the tax plus interest. When in doubt, keep records. It is better to claim a deduction and have to prove it than to skip it and miss the refund.