Understanding Income Tax Refund Amounts

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If you are a wage worker or salaried employee accustomed to getting regular paychecks, you probably feel that the government takes too much out of your pay in terms of taxes; however, you also expect a nice tax refund when you file your returns in the first quarter of the year. This refund is essentially excess money that the government took from your paychecks all year, and it is being returned to you based on credits and deductions.

Even though calculating how much money will be withheld from your pay is fairly easy, your refund is a different story because there is no set percentage; furthermore, it may not be possible to anticipate qualified deductions as well as credits that you may claim. Nonetheless, it is interesting to note that your refund mostly consists of money that did not have to be deducted or withheld in the first place.

Most Americans are used to the idea of getting tax refunds because they often feel as a quick cash injection or even free money from the government, but these funds work like an interest-free loan made by workers, and it is up to them to claim repayment. These funds are certainly appreciated by the U.S. Treasury and the Internal Revenue Service since they act as a sort of cash flow. The IRS certainly does not mind workers who do not claim dependents on their W-4 forms and file 1040-EZ forms with just the standard deduction and no credits; these taxpayers may feel as if they are getting big refunds, but the truth is that they may be giving more to the government than they should.

Refund amounts are determined by tax credits taken, which can reduce the amount of tax that is owed, and by qualified deductions, which lower tax burden by means of reducing the amount of income that IRS can take taxes from.

If your paychecks feel too tight from month to month, you may be able to lower your withholdings by adjusting your W-4. Let’s say you are taking care of a spouse and child; you can declare yourself as head of your household and claim two dependents for a total of three allowances. Doing this will result in more money each paycheck, but it may also lower your refund next year.

A good method to estimate your refund is to use online calculators from the IRS, online tax preparation services and reputable financial websites. The way your income is reported to the IRS also comes into play when calculating your refund; if you receive bonuses that are higher than your base salary or total hourly pay, your tax burden may end up being higher. Taxpayers who earn high commissions and claim many allowances on their W-4 may be surprised to learn that they owe money to the IRS when they file their annual tax returns; for this reason, it is better to check with an accountant, tax preparer or financial planner in case you have to set money aside for next year.