The dreary season has arrived. It’s time to calculate and pay our dues. Although an exciting time for some to receive “extra” money. Others have to pay the difference. What exactly constitutes a tax refund? A refund is formed when you overpay the government on the estimated amount of taxes they thought you would owe. For example if you worked only 1 W-2 job and submitted the correct deductions on your W-4 form, you would probably be left with about +-$100. That’s if you worked no other jobs and or had no other forms of income. This is the most basic form of a tax refund. A refund or tax dues might be affected by other factors such as tax credits, deductions, and marital status. In this chapter we will focus on the main refund affected from working your normal job.

Overpaid/Underpaid

If you overpaid (got a big refund NOT DUE TO TAX CREDITS/DEDUCTIONS) by getting too much taken out each paycheck you need to talk to your employer and get help filling out a W-4 form. This form helps the IRS estimate how much they need to take each paycheck in order to fulfill your tax bill. They key word is estimate, since they will never exactly know how much you are going to make that year.

If you accidentally underpaid, this can be due to large bonuses, or earning too much money that isn’t from your job. If you work two jobs this can also be the case. The IRS only estimates that you’re going to make a certain amount from your jobs separately, not together so they tax based on the single job. If the second job makes you jump to the next tax bracket that can mean you’re underpaying taxes for that quarter.

If you have two jobs it’s recommended to fill out the W-4 for the highest paying job, and include that you have another job. That way taxes are taken out accordingly. If you don’t do this it can lead to owing a lot of money in tax season.

Big Refund ≠ Good

If you’re receiving a big refund on tax day and it’s not due to tax credits and or deductions this isn’t a good thing! This means your job is withholding a lot more taxes than they should leading to smaller paychecks. This also means that you’re giving the government an interest free loan. They wouldn’t do the same for you! This is why you should fill out an updated W-4 form and turn it in to your employer to ensure you are getting the most of your money every paycheck.

Tax Credit or My Money?

You can figure out if a refund is based on your money or a tax credit when using your tax software. There will be a section that says “Your tax liability” (money you owe) and then a section that says “Amount paid” (money already taken out from paycheck) if you paid too much this results in the “refund”. It will also include other sections if you qualified for tax credits and show them accordingly. Some credits result in a cash refund for example the CITC (Child Income Tax Credit). Others only reduce your tax liability and any leftover will result in nothing, for example Capital Gains and Losses.

Bottom Line

The most important part is to get your hard earned money back. The closer your refund is to $0 the better. This means you paid all your tax liabilities and got your money’s worth for that year. If you get your taxes done by a CPA they should be giving you advice on how to avoid paying too much in taxes and might have even mentioned the form W-4 in the past. If you self file it’s important to keep tabs on how much you’re expecting to make that year and keep a savings cushion incase you might need to pay a small difference that year. Remember incomes fluctuate so maybe while you’re earning a lot the first half of the year, you might earn less the second half. This can result to owing a lot of money that you might have already spent. This is why you need to have a savings incase you need to pay.

As always thank you for reading and see you again next Sunday,
– Pablo