6 Reasons Your Tax Refund Will Be Higher in 2025
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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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. Instead, it is 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, 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.
1. 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.
2. 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.
3. 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.
4. 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.
Additionally there are tax credits such as the earned income tax credit and others for people who may need a bit more help.
5. If You Made Charitable Contributions
Charitable contributions, either in the form of a cash donation or an “in kind” donation (i.e., you donate clothing to your local Goodwill) can be deducted from your tax return if you itemize deductions and file a Schedule A. This type of filing is typically only if you have large medical expenses and/or own a home where you have interest deductions, Freund explained, and differs from a Schedule C, which is what self-employed people and independent contractors file to itemize their deductions.
6. If You Lost Money on Stocks
Additionally, if you have taxable investment accounts that are not retirement accounts with investments in stocks, bonds, mutual funds and similar and any of your investments have lost value throughout the year, “You can sell the stock, take the loss and offset any gains or capital gains that may come out of some of your other investments,” Freund explained. This is known as “tax loss harvesting.”
Why a Tax Refund Isn’t Always Good News
While one or more of these options may lead to a bigger tax refund, Freund explained, “Typically a tax refund isn’t because your CPA has been really creative with your overall tax situation — it’s most likely because you have withheld more than you needed to out of your paycheck or, if you are self-employed, paid in more from your paycheck or estimated taxes than you needed to.”
In short, he said, “What you’ve done is you’ve given the government a six-, nine- or 12-month interest free loan.” When interest rates were low, that might not matter so much to you. But now that many banks offer as high as 4.5% to 5% on high-yield savings, money market accounts or CDs, he said, “If you kept that money to yourself, it probably represents tens or hundreds of dollars of interest you’re foregoing by letting the government keep that.”
However, he acknowledged that “many people are not so good with their money and if there’s money sitting in their savings account, they end up spending it. So the tax refund ends up becoming kind of a forced savings.”
If you use your tax refund to achieve a major goal, such as funding an IRA or a child’s college fund, he said, then that “interest-free loan” to the government may not be such a bad thing.
Don’t Wait Until Later in the Year To Review Your Tax Burden
While many people scramble for additional deductions and credits in December, right as the year is wrapping up, Freund recommended meeting with your CPA or advisor several times throughout the year to minimize taxes and plan for your other financial goals.
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