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What determines tax refund

what determines tax refund

Tax refund = amount of tax due - amount of tax paid

IRS rules (and most states) require you to pay during the year "withholding" (and in some cases paying "estimated taxes") so that you have paid 90% of your tax liability by the end of the year.

Many people have large refunds because too much was with withheld during the year.

People have control over their withholding by choosing the number of exemptions on their W-4 form, how much they withhold from unemployment, and how much they pay in estimated taxes.

If you are single, not married, no children, do not itemize deductions, have any capital gains or losses, IRA deductions, or HSA deductions, and maintain the same job all year, generally filing out the W-4 with "2" exemptions will come pretty close.

Now, lets say you are not a renter, instead, you own your own home. For most people this means they will itemize deductions to include mortgage interest, property taxes, and state income tax withholding. When you file your W-4, you would fill out the worksheet and probably have a W-4 with "3", "4", or "5" exemptions. The worksheet basically sums up your deductions against income and divides by the exemption amount to get the number of additional exemptions. So if your interest an taxes add up to $11,400 then you divide

by $3,800 and get "3". Add this to "2" and your W-4 will have "5" exemptions. The higher the number, the less taxes taken out during the year. This will get your tax withholding pretty close so you do not have a large refund.

It gets more complicated when your situation changes during the year. For example, if you rented, did not itemize, and worked half of 2011 earning $100,000 a year and suddenly become unemployed. Had you worked all year your federal taxes would be about $18,675. So for half of the year they may have withheld $9,337. But your income for the entire year was only $50,000 plus unemployment, say $9000, for $59,000. Your federal taxes would be about $4,085. Since $9,337 of federal taxes were withheld you will get a refund of about $5,252 assuming you did not choose 10% withholding on your unemployment.

If you knew that you would loose your job halfway through the year, you could have submitted a new "W-4" to adjust your withholding way down to minimize your withholding but there is only so much you can do. Once the money is withheld, there is no way to get it back during the year. You have to wait until you file your taxes and get a refund. But you can change your W-4 at any time during the year.

Category: Taxes

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