How much do you get back in taxes?
This question comes from the numerous questions I receive of “how much do I get back in taxes?”
It is not easy to know the amount you receive back in taxes, without the aid of certain measures.
Understanding the following terms will enable you to handle your taxes in a better way.
What is a Tax Return?
A tax return is a form that is filled by a taxpayer every year.
This form breaks down your income, expenses, investments, and other relevant information.
In short, a tax return is basically the form one files with the IRS as well as the state government if the person has a state with income taxes.
According to the federal tax system, your employer deducts some amount of money from your pay and remits it to the IRS to pay your annual taxes.
When you file your annual returns in the following year, you calculate the amount you owe that year in taxes using exemptions, deductions, and credits to help reduce the tax bill.
In case you paid more than it was expected, you receive a refund, and the amount you receive as refund is determined by your specific case.
You see, that is why I cannot answer the question of how much do you get back in taxes with a general figure.
Important Note on How Much Do You Get Back in Taxes
In the event where you have had more than expected taxes deducted from your work paycheck, your refund will be given to you following your next annual tax return filing.
Therefore, how much do you get back in taxes in 2020?
On average, the tax refund is around $3,000 for 2020. This is the refund for taxes paid in 2019.
However, “average” is not the same as “guaranteed.”
It is unfortunate and very disappointing to plan for a refund and end up getting nothing in the end.
However, owing money to the government is even worse.
There are various tips you can use so as to increase your tax refund at any given year.
Whether you got the refund you were entitled to, or you maybe feel you deserved more, these tips will be helpful:
- Remember the refundable credits.
- Claim a relative or friend that you have been supporting
- If you qualify, take above the line deductions.
- Set aside money for your retirement as this will get you multiple benefits
- Avoid taking the standard deduction if you can itemize.
How Much do You Get Back in Taxes?
For you to understand the amount you receive back in taxes, it is important to take a quick lesson in withholding.
You might have noticed a big part of your income is taken away from your paycheck every month.
Other than the 401ks and other expected deductibles, another main reason for this is that the government withholds the missing amount depending on the way you filled out the IRS form.
This is the form that the employer uses to decide the amount of tax to withhold from your paycheck.
To, therefore, have a simple idea of how much do you get back in taxes, it is key to:
- Calculate the total income tax that you owed for the year. You can do this using the tax calculator just to have a rough estimate.
- Find if the amount withheld is equal to what you find or more. You can do this by reviewing your W2 form at the close of the tax year.
Tax Refund = Amount withheld – Your tax obligation
This formula helps you to breakdown how tax refunds are calculated in a simple way.
This formula does not include exemptions, benefits claimed all year, and tax deductions.
Through this formula, however, you are able to tell how much you could receive back from the IRS come the tax season.
How Tax Refunds Work
If you are an American resident, you are required to pay a part of all your income and earnings to the federal government so as to comply with your tax duty.
Your employer has the obligation of collecting taxes from your paycheck and remitting the IRS for you.
The amount of tax you pay in terms of federal withholdings is determined by the amount of money you earn, as well as how you fill the IRS Form W4 (as I have mentioned above).
This is received by your employer and comprises your filing status and the number of your dependents.
In case you claim more dependents, you are able to retain more during every pay period.
Taxes for Social Security and Medicare are also deducted from your paycheck. These deductions are referred to as Federal Insurance Contributions Act (FICA) taxes.
In the year 2019, the FICA tax rate stood at 7.65%. From this, 6.2%, which was listed as OASDI on the pay stub was for Social Security and 1.45% for Medicare.
Social Security taxes do have a wage ceiling.
In 2019, the wage ceiling was $132,900. Gross income high beyond that threshold is not included.
For the year 2020, this rises to $137,700.
When it comes to filing your taxes, you put together all your earnings as well as all deductions and tax credits you may have so as to get the exact tax obligation that is expected from you.
In the event where you have had a lot of money deducted from your pay, you should expect a refund from the IRS.
If just a little amount was deducted from your pay, then it is you who owes the IRS the difference.
Now, do you have an answer to how much do you get back in taxes?
Let’s move on
Are Lower Tax Refunds a Bad Thing?
Not necessarily as lower refunds can be an indication of something good.
I know it feels great to receive a tax refund to your bank account and even better when the amount is huge.
However, to receive a huge amount in refund is to mean that you give the IRS much more than you are expected to in the year.
Also, a refund from the IRS comes with no interest. This comes as an opportunity cost on your side.
Maybe you would have invested this money in something else, and resulted in accruing more money within this time frame.
Again, if you happen to owe the IRS during tax time, it means that your employer is not withholding sufficient taxes from your paycheck.
In as much as it is good to have more money any time that you are paid, you will be expected to write a check to the IRS while you have been paying employment taxes all year long.
We all want our tax bill to come out to $0 or close to that. If you pay the IRS very little or much more in the year, try to adjust the information in your W4.
You can use the IRS tax withholding estimator to know the exemptions you are entitled to receive.
I hope the question of how much do you get back in taxes has been answered.