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Tax refunds often feel like a bonus after the hassle of filing your taxes, but many taxpayers overlook the fact that this is simply your own money being returned after overpaying or under-deducting throughout the year. A larger tax refund in 2025 might indicate changes you need to make with your tax planning or accountant. However, who doesn’t love getting money back instead of owing taxes?
According to Alex Freund, a financial advisor and owner of Freund & Smith Advisors, a Northwestern Mutual firm, here are six reasons your tax refund could be higher in 2025.
6 Reasons Your Tax Refund Could Be Higher in 2025
1. If You Earned the Same (or Less) Income as Last Year
If your income remains the same or decreases in 2025, you could see a higher tax refund due to inflation-related adjustments to tax rates, brackets, and deductions. According to Freund, “Almost everything in the tax code is scheduled to increase annually with inflation.” So, even if your income doesn’t rise, the inflation adjustments to tax deductions and brackets could result in you paying less in taxes, leading to a larger refund.
2. If You Made Increased Contributions to Retirement Accounts
Contributing more to tax-advantaged retirement accounts like a 401(k) or Roth IRA can lower your taxable income and potentially boost your tax refund. Freund explains that these contributions are incentivized by the federal government to help individuals save for retirement, thus reducing your immediate tax burden. For example, if you’re in the 22% tax bracket, contributing to a retirement plan could save you 22 cents per dollar.
3. If You Take Self-Employment Deductions
Self-employed individuals and independent contractors can take advantage of various tax deductions for business expenses. Freund notes that if you had higher expenses or discovered new deductible items, you could reduce your taxable income and increase the amount of tax refund you receive. Be sure to work with a CPA to ensure you’re claiming all eligible deductions.
4. If You Qualify For Tax Credits
Tax credits can substantially reduce your taxable income and potentially increase your refund. Freund explains that credits, such as those for installing energy-efficient appliances or solar panels, are incentives for individuals to invest in environmentally friendly projects. Additionally, credits like the Earned Income Tax Credit (EITC) can benefit low-income earners, providing a direct reduction of the tax owed.
5. If You Made Charitable Contributions
Charitable donations can be deducted from your tax return if you itemize deductions on Schedule A. If you’ve donated cash or items like clothing to charities such as Goodwill, these contributions can increase your tax refund. This is particularly beneficial if you’ve also had significant medical expenses or mortgage interest payments, as these can also be itemized.
6. If You Lost Money on Stocks (Tax Loss Harvesting)
If you’ve experienced losses on investments, such as stocks, bonds, or mutual funds, you can offset those losses against any capital gains through tax loss harvesting. Freund explains, “By selling the stock at a loss, you can reduce your taxable income and potentially get a larger tax refund.” This strategy helps lower your overall tax liability, especially if you’ve made significant gains in other investments.
Why a Larger Tax Refund Might Not Always Be Good News
Although a higher tax refund can be a pleasant surprise, Freund cautions that it often indicates you’ve been withholding more from your paycheck than necessary. Essentially, you’ve been giving the government an interest-free loan for months, which could have been earning interest in a savings account. With current interest rates as high as 4.5%-5%, you could be missing out on potential earnings.
That said, many people struggle with saving money, and a tax refund acts as a “forced savings” plan. If you use your refund for meaningful financial goals, like funding an IRA or contributing to a child’s college fund, it may not be such a bad thing.
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Start Planning Now – Don’t Wait Until December to Review Your Tax Burden
Instead of waiting until the end of the year to look for tax deductions and credits, Freund recommends working with your CPA or financial advisor throughout the year to minimize your tax liability. Proactive tax planning can help you avoid surprises and align your financial strategies with your long-term goals.
By understanding the factors that can increase your tax refund and taking steps to optimize your tax situation, you can maximize the amount you receive in 2025.
