I’ve only recently joined the working force, and I am still not sure of this entire concept.
I know I am supposed to go to an accountant and show him a slip from my job for the returns, and also slips from my stocks that show all the net changes.
What I don’t understand is \*why\* I receive a certain amount after doing all of that.
In: 8
The government essentially pre-calculates how much tax should be withdrawn from your salary. This is a “best guesstimate” based on what they know of your annual income and the tax rates that apply. Each pay cycle, the appropriate amount is withheld from your take-home pay, based on this ‘guesstimate’.
So the tax has already been withdrawn by the government. This is the important point here. They have *already taken the tax money from your salary*. But their ‘guesstimate’ may not be accurate. There are many ways in which a person’s actual income will be lower than the government estimate, or the amount of tax they should be paying is less than the government estimate.
In both cases, the government has *over-taxed* you, and needs to refund the difference in tax between their ‘guesstimate’ and your actual real income. This is the tax refund.
Each country is a bit different, but some common examples include:
* Not working for the entire year. Say the government sees that you earn a salary of “$120,000 per year”, but during that year you only actually worked 10 months and your actual income was really only $100,000. The government has over-estimated your income by $20,000 and taxed you too highly.
* Using losses from property or shares/stocks to offset your income. Say you earn $120,000 income but own shares that depreciated by $20,000. You may be able to use this to reduce your ‘actual’ income to $100,000. Again, the government has over-estimated your income and taxed you too highly.
* Making extra contributions to your superannuation/retirement funds. These are sometimes taxed at lower rates so can reduce your tax burden. e.g. Your salary is $120,000 and taxed at 30% but you contribute $10,000 to superannuation which is taxed at 15%. That $10,000 has had too much tax (30% instead of 15%) applied to it.
* Making contributions to charities or other organisations. These can be tax-deductible.
* If you had to spend your own money for travel, car fees, clothing, protective gear, laundry bills, etc that is directly related to your work. These are also often tax-deductible.
In all these cases, you can see the government has taken too much tax money from you and needs to pay some back.
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