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Best Investments for Boosting Your Tax Refund

Updated for Tax Year 2022 • December 1, 2022 01:59 PM


OVERVIEW

If you're like most taxpayers, you're expecting a tax refund this year. The average refund amount for tax year 2020 was $3,100. If you want to boost your tax refund, consider investing in your retirement or your home before filing your taxes.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

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Key Takeaways

• When you make a contribution to a qualifying retirement account for 2022, you can deduct up to $6,000, or up to $7,000 if you’re age 50 and up, from your taxable income.

• If you have a low or moderate income, you may qualify for a Saver's Credit of up to $1,000 (or $2,000 if filing jointly) when you contribute to an IRA or certain other qualified plans, including a Roth IRA.

• If you invest in a qualifying alternative energy system, you can claim 30% of the cost of the system through 2032 (and a reduced percentage of the cost through 2034) with the Residential Clean Energy (RCE) credit.

• In addition to the RCE, you can receive annual credits of up to $1,200 per year for energy-saving improvements to your home with the Energy Efficient Home Improvement credit. The credit is available for tax years 2023 through 2032.

Retirement Contributions Lead to Bigger Tax Refunds

Favorable tax provisions for retirement planning make investing in your nest egg one of the best ways to boost your tax refund. The IRS even allows you to benefit twice when it comes to retirement accounts. This unique opportunity allows you to both deduct up to a certain limit and get a refundable credit if you earned less than a certain amount of money.

Here's how to take advantage of the same retirement contribution twice to maximize your tax refund:

  • Take the deduction for a traditional IRA, which is limited to $6,000 as of tax year 2022 (or $7,000 for filers ages 50 and up). Other retirement accounts also qualify.
  • You can then get an additional credit of up to $1,000, or $2,000 if filing jointly, when you contribute to an IRA or certain other qualified plans. This tax benefit is known as the Saver's Credit, also called the Retirement Savings Contribution Credit.

If you are eligible, you can open a traditional IRA and claim the credit for the previous year up until the upcoming tax deadline.

Roth IRAs work a bit differently when it comes to boosting your tax refund. You can't deduct Roth IRA contributions, but they do qualify for the Saver's Tax Credit.

Other retirement plans that qualify for the credit include:

  • 401(k)
  • 403(b)
  • SIMPLE IRA
  • SARSEP, or Salary Reduction Simplified Employee Pension Plan

Tax credits boost your refund more so than deductions, but they aren't available to filers at all income levels. They tend to favor taxpayers with low and moderate incomes.

To take advantage of the Saver's Credit for tax year 2022:

  • single taxpayers can earn no more than $34,000
  • heads of household can earn no more than $51,000
  • married taxpayers who filed jointly can earn no more than $68,000

By answering a few simple questions when filing your tax return with TurboTax, you'll receive recommendations for credits and deductions that are specific to your income and situation, boosting your tax refund.

 


 

TurboTax Tip: If you open and contribute to a qualifying traditional IRA by the upcoming tax deadline, you can claim the tax deduction for the previous year. If you qualify, you can also claim the Saver’s Credit for that contribution.

 


 

Get Some Credit for Being Energy Efficient

Energy-saving improvements to your home pay off in a couple of ways: You save money over time through low or no energy bills and you get to take advantage of tax credits.

  • For example, through the Residential Clean Energy (RCE) credit, you can invest in an alternative energy system and claim 30% of the cost of the system through 2032.
  • After that, you can still claim a reduced percentage of the cost through 2034 for solar electric and solar water systems.

Improvements that the credit covers include qualified:

  • Solar electric systems
  • Solar water heaters
  • Small wind energy turbines
  • Geothermal heat pumps
  • Fuel cell property (subject to certain limitations)

In addition to the RCE credit above, the Energy Efficient Home Improvement credit is available for 2023 through 2032. This credit provides annual credits of up to $1,200 for improvements to your home including:

  • Home energy audits: $150
  • Exterior doors: $250 per door (up to $500 per year)
  • Exterior windows and skylights, central A/C units, electric panels and related equipment, natural gas, propane and oil water heaters, furnaces or hot water boilers: $600
  • Heat pumps and biomass stoves and boilers: $2,000 (this one category qualifies to go above the $1,200 annual limit)

This credit takes the place of the Nonbusiness Energy Property (NPE) credit that is still available through the end of 2022 but it has a lifetime limit of $500 ($200 for windows).

Eligible costs for the NPE credit include the purchase price and installation charges for efficient heating and air conditioning systems, water heaters, and stoves that run on biomass fuel. You may also claim a credit for the purchase of energy-efficient doors, windows, skylights, certain roofs and the cost of increasing insulation in the home. However, you cannot include the installation costs for this equipment in the credit.

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