I saw a post on a social media platform the other day that said:
“Has anyone filed their taxes yet? I heard people are getting a lot smaller refunds this year. Wondering what to expect when we file.”
The post was flooded with comments of people stating their refund amount. The responses were all over the board. There were comments with large refund amounts, small refund amounts, and everything in between. Some were upset their refunds were smaller than others. Then finally, someone commented, “your refund is specific to your situation. It won’t be the same as anyone else's.”
I was elated. This comment hit the nail on the head.
Disclaimer: We at Your Money Line are not tax professionals and we don’t have a CPA on staff. If you’re unsure of any specifics regarding your income tax return please hire a professional. We’re here to help you learn some of the basics of taxes. Knowledge is power. The details of your return should be discussed with a professional.
The most important thing to know about filing your taxes is that there is a “right answer.” If you hear someone say “I filed with ABC Company and they got me the biggest refund” or “I didn’t like the refund they showed me at XYZ Company so I went home and used an online filing system and got more money back” just know that one of these places was giving them the wrong refund amount. Maybe they are entitled to the larger refund, but bigger doesn’t always mean better. But let’s back up.
Throughout the year your employer withholds federal taxes from your paycheck (assuming you’re a W2 employee). The amount they withhold is determined by your earnings per pay period and how you filled out your W4. The new W4 asks questions about your marital status, how many jobs you have, how many children you’ll claim under 17, and more. The numbers you place on your W4 serve as a guide for withholding for your employer. The IRS has an employer guide which tells the employer how much to withhold based on what’s written on your W4.
If you check your pay stub you’ll see the amount of federal tax withheld per pay period. If you’re unsure whether or not your W4 is filled out correctly you can use the IRS “Tax Withholding Estimator” to help. This estimator will walk through key components of your filing like number of dependents, marital status, and more. If after you complete the calculator you find the IRS suggested withholding is different than what you see on your paystub ask HR for a new W4. You can fill out the new W4 with the suggestions made by the IRS.
The amount withheld by your employer throughout the year can be viewed like a payment on a bill you know to be due April 15th (except you’re not sure how much you’ll owe). Each pay period your employer is making a credit toward this estimated balance on your behalf. The total balance due April 15th is the same regardless of how much your employer does or doesn’t withhold. But your refund, or lack thereof, will be determined by the amount paid toward this balance.
It’s not until the end of the year that you can know for sure what your tax liability will be. Your tax situation can change (potentially dramatically) all the way through December 31st. For example: Your tax filing status is determined by your marital status on December 31st and December 31st only. You might be married for the entire year, but if you’re getting a divorce and this divorce is final on December 30th you’re considered a single person for the entirety of the tax year. The same is true in regards to dependents. If you have a child on December 31st you’re able to claim that child for all of the tax year.
When the tax year closes the IRS will determine your total liability by assessing your income, deductions, and credits. It’s your job to find a tax preparer who is able to determine the amount the IRS knows you owe. Maybe that’s TurboTax, H&R Block Online, or a CPA. When you sit down with your preparer they will determine how much your tax liability should have been. Then, they’ll deduct the amount you’ve paid in federal taxes for the year. The difference between these amounts is how your refund is calculated. If you’re unhappy with your refund amount discuss this with your preparer.
A large refund might mean you’re having too much withheld throughout the year. Ask your preparer about updating your W4 to have less federal income tax withheld throughout the year. Keep in mind if you adjust this withholding and all things are equal you won’t have as large of a refund the following year. If you owe taxes upon filing you could have your preparer suggest how much you should increase your withholding per paycheck.
The bottom line is this: your tax refund is entirely dependent on your situation. You can’t expect to compare your refund to any one else. In fact, you can’t compare your refund even to your previous years refunds. We know tax time can be potentially stressful. But knowing how your tax liability can help decrease the negative emotions that come with this time of year.