File early and optimize your tax returns for the biggest refund

The last day for most people to file their taxes this year is April 18.

The Internal Revenue Service (IRS) swung into its peak season with an expanded service team and upgraded technology. To fund the rollout, the agency is drawing upon the $80 billion Congress assigned it last year, of which half is earmarked for optimizing operations to make filing easier for taxpayers. A few weeks in, it seemed to be making a difference. Already the IRS is getting through a far higher number of filings and issuing more returns faster than in previous years.

Returns so far

According to IRS data, this year has gotten off to a flying start.

More people are filing earlier. The IRS had already processed 18.95 million tax returns as of Feb. 3. That’s a 13.4% increase on the number the tax department received by that time last year. The tax department is getting through them faster, too, having already processed 16.7 million of those returns, nearly 30% more than the previous year.

Digitalization continues to trend, with the total number of e-filing returns increasing by 9.5% year-on-year. The vast majority of tax returns — 92.4% — are now submitted digitally.

The IRS has also issued almost eight million tax refunds already as opposed to only 4.3 million that had been issued by that time last year. However, refunds are generally smaller, with the average refund amount being $1,963. That’s a $200 decrease since last year’s filings.

The numbers are in flux, however, and will likely change over the coming weeks as the IRS processes millions more returns before April 18.

Before you file

There are several prudent moves individuals can make before filing.

First, check the new set of tax brackets for 2023. Even marginal deductions can significantly affect your total tax bill if you fall into a new bracket. For instance, a single filer earning $42,000 in 2022 would have been taxed at a 22%, while this year, that same income level will only be taxed at 12%.

Before filing, users can create an online IRS account, which enables them to access tax records and make and view payments. Be aware that opening an IRS account does not automatically enable e-filing. Users will still need to register for electronic filing separately. Going online allows easy access to a simple one-stop portal.

Above and below

When it comes to deductions, there are two broad categories of tax deductions — “above-the-line” and “below-the-line.”

In accounting jargon, this “line” delineates a taxpayer’s Adjusted Gross Income (AGI), which determines the tax bracket from their actual taxable income, or what remains after additional tax breaks are deducted.

Contributions to health savings accounts (HSA) are one of the most common above-line deductions, potentially shifting you down a bracket or two. The same is true for company retirement plan contributions.

These are among the top tax-reducing strategies most commonly used by high-income earners — usually those paying above 30% income tax — but can be adopted by all taxpayers to lighten their load.

There are two options for below-line deductions. Individuals can either claim the standard deduction or list several itemized deductions. The latter makes sense if there are enough deductions that aggregate together to exceed the standard deduction, but doing so requires more record-keeping and effort.

The Tax Cuts and Jobs Act of 2017 altered the deduction calculus for the majority of Americans. The bill almost doubled the standard deduction, bumping it up from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for married joint filers.