With tax season just around the corner, you may be wondering how federal tax refund is calculated. Will you be receiving a refund from the IRS this year? It’s always nice to receive one that serves as padding, for spring spending. Read on, to help you figure out exactly how much you’ll be receiving in federal tax refunds this year. An IRS tax calculator is always useful.
How Federal Tax Refund is Calculated: Understanding Tax Refunds
What Tax Withholding is for
When you receive your salary, you’ll see certain tax amounts withheld on your payslip. This is your withholding tax. It’s the amount withheld by your employer, so they can pay it to the IRS.
Most Americans spend most, if not all, of their money before they can pay their taxes. This is why the federal government created a system that lets it receive taxes, even before taxpayers get their hands on their take-home pay.
Why the IRS Issues Refunds
Your employer determines the rate of your withholding tax by calculating your income, personal allowances, and other taxes you want to be withheld, as listed on your W-4 form.
Sometimes, however, your rate of withholding tax is greater than your actual tax liability, or the amount of tax you have to pay. This is why the IRS issues tax refunds to taxpayers, who qualify at the end of each tax season.
How Federal Tax Refund is Calculated
— IRS (@IRSnews) December 19, 2017
To find out how much you’re getting from the IRS, you need to do the following:
1. Determine your annual income
To determine which tax bracket you fall into, you need to know your income. It’s important that you keep track of all your income sources, including your salary, bonuses, commissions, property rentals, and investment earnings.
You can also look out for your copy of Form W-2, which the IRS sends out every January. This is your Wage and Tax Statement. It lists out wages paid and taxes withheld, for the past year.
2. Find out if you have tax deductions
Tax deductions allow you to reduce your taxable income and possibly, receive a bigger refund. Some common tax deductions include health expenses, charitable contributions, and work-related travel and education expenses.
You have the option to choose standard deductions, or itemized deductions. If your itemized deductions are lower than the standard deductions, choose the latter.
These are the standard deductions for federal tax returns, for the tax year 2017:
- Single – $6,350
- Married Filing Jointly – $12,650
- Head of Household – $9,350
- Personal Exemption – $4,050
PRO-TIP: If you’re married, you may want to file taxes jointly, because this can lead to a bigger tax refund than if you filed separately.
3. Calculate your tax liability
Your tax liability is simply the amount of tax you have to pay. This depends on which tax bracket you fall into.
Tax brackets change every year, along with how much income you make, so make sure you check with the IRS first.
4. Know your tax credits
Unlike tax deductions, which reduce your taxable income, tax credits reduce your actual tax liability. Make sure to check which credits you qualify for, to ensure you get a sizable federal tax refund.
Common tax credits include the following:
- Earned Income Tax Credit
- Child and Dependent Care Credit
- American Opportunity Tax Credit
5. Calculate your tax refund
Subtract your tax deductions from your income, to determine your taxable income. Next, find your tax bracket, to determine how much tax you need to pay before subtracting tax credits that you are eligible for. The result is the total amount of taxes you owe the federal government.
If your withholding tax is greater than your total income tax, you can expect to get a refund. You can calculate the total amount simply by subtracting your total tax from your withholding tax.
If you want to maximize your tax refund, check out this video by the Steve TV Show. Here, Steve Harvey talks to a CPA from TurboTax, to teach you how you can maximize your tax refund, and make money from tax returns:
With tax season coming in, you might want to get ready for filing your taxes. Now that you know how federal tax refund is calculated, you’re in a better position to maximize your refund, and get the most out of your tax return.
Any other tips, comments, and suggestions on how you can get a bigger tax refund? Let us know! Share your thoughts in the comments section below.