Intro
Let’s say you met with your tax preparer, or completed the forms yourself, and at the end of it all, you are showing a balance owed. What did you do wrong with the return? Did the preparer make a mistake? Your neighbor, brother, niece, and co-worker all received refunds, why didn’t you??? Last year you got a refund, you were planning on building a swimming pool with this year’s refund…the preparer must have made a mistake! We hear these comments often during tax season. If you typically get a tax refund, and you didn’t this year, the reason is more simple than you think.
Underwithholding
Most people believe that if they don’t get a refund that there is an error or a change in the tax law. However, the overwhelming majority of the time people that owe have under withheld all year long. This is due to their elections on their W-4. If you owe, not enough is being taken out of your paycheck.
What is a Refund
A refund from the IRS is only an overpayment of your liability owed. Your income generates a taxable amount owed to the IRS. If you over-withheld, you’ll get a refund. If you underwithheld, you’ll owe a balance. Some clients show very little withheld on their w-2’s and then are shocked when they receive no or a small tax refund. Remember, it is only an overpayment of what is owed. If you don’t have many credits, the little you put in it will result in little coming back, or a balance owed. Refunds are not ways to earn new money, they are a refund of your earned money coming back to you.
Checks through the year
It is important to analyze your withholdings throughout the year to make sure you are on track. You can use tax calculators to estimate your tax liability, and use your paychecks YTD withholdings to calculate your tax run rate. We recommend to clients to analyze your tax status at least quarterly to make any necessary adjustments. You don’t need to be surprised in April of the next year of what refund, balance owed, or other tax season results lay ahead of you. Plan it out.
If you want help with your tax return or if your refund results in a tax problem, give us a call 800-822-4122 to learn your options.