Americans don't agree on much, but try to find one who argues against getting a tax refund. The funny thing is, a tax refund is just the government giving you back money you earned in the previous year. It's just what you overpaid to them in taxes that year. Just how much comes back to you is based on several factors, but the biggest reason is how much your employer takes out of your checks all year.
IRS Form W-4
Most new employees complete a ton of paperwork before they ever get to a desk. One of those forms is the Internal Revenue Service Form W-4. This is the Employee’s Withholding Allowance Certificate where you record the number of allowances you claim for federal income taxes. The fewer allowances you choose, the more the employer withholds from each paycheck. You can choose to have additional income withheld, but most people go with the standard allowance for themselves and dependent family members.
Distinguishing Taxable Income
Taxable income isn’t the same as the amount of money you make. You may have money withheld for your employer savings plan or flexible spending account. You don’t pay federal income taxes on that income. Taxable income is reflected on the IRS Form W-2.
Evaluating Other Income
All of your income must be reported on federal tax returns, including anything that wasn't taxed immediately. When you add that income to your regular employment income, your taxes may increase. For example, if you work as a contractor on the side, the business gives you a Form 1099-MISC if it paid you more than $600 during the tax year. Contractors don’t have taxes withheld, and you pay those taxes by the quarter or at tax time. You also pay taxes on interest earned from your savings account. All of that cuts into that once hefty refund check. If there enough cuts, you could end up owing money to the government.
Credits and Deductions
Depending on your situation, you could be eligible for any of a wide swath of tax credits or deductions that can reduce how much you owe and increase your refund. Common deductions, which directly reduce the amount of tax you owe, are available for homeowners with mortgages, working people with low income and students and their parents.
Following the introduction of the Tax Cuts and Jobs Act, some common deductions have been altered through legislation, including those relating to home mortgage interest and property tax. For 2019 filings, taxpayers can deduct up to $1,000,000 in mortgage interest. Property tax deductions have now been capped at $10,000, a sum which includes all State and Local Tax, or SALT, deductions.
Deductions, which reduce the amount of income on which you're required to pay tax, are available for people who drive a personal car for work, homeowners who pay property tax and people with sufficiently high medical and dental expenses, to name a few.
Adjusting Your Current Withholding
There is a way to adjust your taxes if you want to pay the right amount all year. Take all of your income into account, then use the IRS withholding calculator to determine a reasonable adjustment to your withholding. Review IRS Publication 919 entitled “How Do I Adjust My Tax Withholding?” before making changes. Contact your employer and request a new IRS Form W-4 to change your number of allowances. Your take-home pay will change when your employer applies the new calculations.
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