Tax Refunds, Tax Returns, And Withholding: Why Would You Owe More In Taxes?
Every year, many people get tax refunds back. Understandably, it can be surprising if you go from getting a tax refund back to having to pay the IRS, instead. This is especially true if you haven't changed your salary. What exactly controls whether you get a tax refund?
Tax Withholding: Why You Often Get a Refund
With every paycheck, your employer deducts a certain amount of tax and pays this. This is an estimated amount of how much you owe, based on the number of dependents you have. The important word is estimate. If this "withheld tax" amount is estimated incorrectly, you'll either get a refund at the end of the year, or you'll need to pay in.
Since your employer's deductions don't take into account any tax credits you may have or any tax deductions you may have, you almost always pay more than you really owe. This is why most people who have a regular paycheck end up with a refund: because they add their tax credits and deductions on at the end of the year.
Owing More: Why Your Return May Not Be Correct
Occasionally, the amount of calculated tax being withheld may change, as it did in 2018. When this happens, employers may actually start withholding a lower estimated amount. At the end of the tax year, you will owe money because you haven't paid as much as you needed to.
It's important to note that regardless of the amount that is withheld from your paychecks every pay cycle, the amount that you owe on your tax return isn't changing. What's changing is whether you've properly paid it throughout the year. If you haven't paid enough throughout the year, you just need to catch up at the end of the year. If you have paid too much, you do get a refund—but that money was taken from your previous paychecks.
Making Sure You Get a Refund
It's possible to make sure you get a refund every year, simply by increasing the amount of money that you pay in taxes every paycheck. This can be a good idea because it means that you'll never get caught by surprise by a hefty tax bill.
If you aren't sure whether your tax situation is going to be positive or negative, you should talk to a tax preparer. A tax preparation consulting firm, like Monheit Frisch CPAs PLC, will be able to tell you what you should do to avoid owing money.