i always see so many people talk about tax returns or tax season around this time and its so confusing. to me it seems like free money
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A tax return is money that the government over charged you throughout the year. When you file your return with all its tax deductions the government gives you back your own money. It’s not free money, it’s your money that was taken and you’re asking for it back.
Gov demands money (robbery) you always overpays because if you underpay you go to jail. They then send you the difference if what you overpaid 12 months later with no intrest
Tax “returns” are just records of the taxes you paid and why. You’re probably thinking of tax *refunds*.
Most people pay taxes throughout the year by having them automatically taken out of their paychecks (“withholding”). But the amount taken out of your paycheck is just an estimate. It may be too low (in which case you’ll owe money, though typically only a small percentage of the taxes you’ve already paid), or it may be too high (in which case you get money back from the IRS, since you overpaid them).
If you work a normal salaried job that gives a W2 (the usual form for most people’s income), you would have filled out a form answering some common questions used to estimate how much should be withheld for tax purposes.
People are required to report to the IRS:
* their income
* any tax deductions they qualify for
This is what goes on a tax return.
As for why refunds are a thing:
The vast majority of people are what are called “W-2” employees. Basically, this means that you work for a company and get a wage/salary (which the company reports to both you and the IRS on a form called the W-2 form).
W-2 employees fill out a form when they start their job laying out which basic deductions they qualify for to arrive at a rough estimate of their tax bill. Rather than paying their taxes all at once they just get money deducted out of every paycheck. Once they file their return (i.e., declare which tax deductions they qualify for), they’re likely to be found to have overpaid their taxes and get a refund.
In the US, people tell their employer to set aside a chunk of their paycheck to cover their income tax requirements. You fill out a paper when you get hired that tells the business how much of the paycheck they should be setting aside and sending to the government, based on a series of questions like “are you single? Do you have a family? Is this your only job?”
Then, when you fill out your tax forms, you add information like “did you donate to charity this year, did you have any major expenses for business?” And figure out exactly how much you owe in taxes.
For most people, the amount that was set aside by your employer is more than exactly how much you owe after finishing the paperwork. The government will then send you a check with the difference.
The trick is that precisely estimating the exact amount of money needed to cover your taxes is hard, since there’s a lot of variables involved. Most people feel it’s better to err on the side of caution and have their employer take a bit more than is necessary to send to the government, rather than the opposite, where you might discover that you owe the government more money than they had been setting aside.
When you set up your W-2 when you start a job, you get the option to set a number of dependants. Based on the number of dependants you say, an estimated amount of tax is taken from each paycheck. At the end of the year, when you file your taxes, a more accurate count is made including deductions (things that the government wants to encourage, such as donations to charity, education, etc.). This causes a difference between what you paid throughout the year and your year end calculation, causing you to either be owed money, or owe money.
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Tax RETURNS are your report to the tax authorities telling them all the information that they need to check how much tax you should have paid.
Tax REFUNDS are money returned to you because you’ve already paid more tax than you needed to.
In the United States the system is set up so that most employers take money out of employee paychecks and send it to the government as “withholding” toward their taxes. The amount of money withheld typically depends on the employee’s income and their family size, but it varies a bit. This amount is not the actual amount for taxes, but something like a really bad approximation.
When “tax season” comes around, which is typically 1 January to 15 April, where individuals “file their taxes” for the preceding year, by filling out a bunch of forms (or doing it electronically these days) where items relevant to taxes are reported – income from jobs and from investments, family size, mortgage payments, medical expenses, education expenses, retirement savings, and potentially a whole host of other things. These figures are factored into the taxes in various ways.
The end result is a number dollar figure of the taxes the person needs to pay for the year. That figure is compared to the amount that was withheld. If the government took too much money then the remaining will be a tax return given back to the person. If the government did not take enough money then the person needs to pay what they owe.
Much more important than the amount of money they get back, is the amount of money they don’t get back.
This is a rather simplified explanation, but it does the trick.
Tax returns are the forms you have to file annually, where you document your income from jobs, investments, and deductions, credits, etc. to determine what you owe.
Since people have money withheld from each paycheck and remitted to the government, they may have overpaid throughout the year. if that is the case, then they get a TAX REFUND. This is not “free money”, but a surplus of tax payments you made over the past year.
Say you owe $5200 in taxes, but $125 was withheld from each weekly paycheck for income taxes. Since you paid $6500 but only owe $5200, you would get a refund of $1300.
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