Not many people look forward to tax season. It’s a time of year that most people associate with filling in endless, tedious forms, trawling through accounting records or, worst of all, writing a huge check to the Federal government.
However, some people do look forward to tax season for one compelling reason – they believe they are owed a substantial amount of money by the IRS. This assumption is not without merit – the IRS estimates that 77% of taxpayers are paid a refund, with an average refund amount of $2,913. That’s a decent amount of money by any measure! So, the chances are that if you are a tax payer, they owe you money.
So how does a taxpayer end up being owed money by the government? In the US, if the taxpayer is employed, income tax payments are withheld every month by the employer. The amount of income tax withheld doesn’t always fully correlate to the amount of tax owed, especially if the taxpayer’s circumstances have changed during the course of the year. Even if circumstances have remained the same, tax credits and other deductions aren’t calculated until the end of the year, and in some cases deductions alone can lead to a substantial tax refund.
Using an IRS tax refund calculator is necessary during the course of the tax return process, because you will have to give the IRS an estimated amount of the refund that you think you are due. It’s also fantastic to see that number, and look forward to that check coming in the mail or the direct deposit in your bank account.
Because it’s money that you aren’t expecting to get, some people treat their IRS tax refund as “free money”. This couldn’t be further from the truth – it’s not free money, it’s your money. Money that you have lent to the government as an interest free loan. When you start thinking of it in these terms, it’s natural to try to avoid getting a large tax refund by paying the right amount of tax over the course of the year instead.
If you don’t anticipate that your circumstances will change over the following year, then this is easy. You can simply make the calculation and instruct your employer’s finance department to deduct the correct amount from your monthly salary.
If you are on a low or medium salary, it might be wiser to continue your current arrangements. Although you may miss out on the interest payments on your money, it’s certainly better than being charged a penalty. The fee for not paying enough tax is $1000 for individuals with direct withholding.
Once you’ve used an IRS tax refund calculator to determine how much money they owe you, the next step is to use a state tax refund calculator for your particular state. If the IRS owes you money, the chances are that you are also owed money by your state’s tax authorities. You might have two large checks to look forward to!