Many US taxpayers look forward to receiving their tax refunds during the tax season. However, if you have never prepared your own tax return, it can be mysterious as to how the refund amount you receive is determined. The good news is the process is easy.
Once your taxable income has been determined, a tax table is used to figure out how much income tax you have for the year. Then, that number is compared to the amount of money that you paid throughout the year.
If you paid more than your tax, you will receive a refund for the amount over. However, if you did not pay enough, you will be expected to pay money rather than receive money back.
When you work for an employer, you have a portion of your salary withheld from your paycheck. The government does this so they can be 100% positive that they are going to get their money. They understand that individuals run through money, and if they take it before you have the chance to spend it, they will have nothing to worry about.
The amount that you have to pay is based on an estimation of the amount of taxes you will owe when the end of the year arrives. Your employer bases the amount off your estimated annual income and your exemptions. It is very important that you keep your W-4 form up to date so you can have the correct amount of money being withheld from your paycheck each pay period.
How Withholdings Are Determined
You may or may not be aware of which tax bracket percentage you are in. If you are aware, you also may have noticed that your employer withholds more money than the tax bracket requires too. However, this is because they also factor in social security, Medicare, and state taxes.
Social security taxes take up 6.2% of your earnings, while Medicare taxes takes 1.45%. Therefore, before any money is taken out for income taxes, you have already had 7.65% of your income withheld.
Determining Your Refund Amount
The refund amount that you will receive is determined by analyzing the income tax and the federal income tax that was withheld throughout the year. In the event that you had too much federal income taxes withheld from your paycheck, you will receive a tax refund during tax season. Here is a free tax refund calculator.
Each year your refund is determined based on your w2 amount and how much you paid in federal taxes from your paycheck throughout the year. The amount you owe is determined when you file taxes, and if you have paid too much, you will receive a refund.
Additionally, the majority of the money that you have taken from your salary is not going to paying taxes. Instead, it has to go to state taxes, Medicare tax, and Social Security tax. In addition, keep in mind if you have a premium through your employer, money could be taken out for that, which makes the amount of money coming out of your paycheck even higher.