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.
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When you get a job, you’re supposed to pay an estimated part of your earnings in taxes. (Taxes go to support many things we use as part of a society, roads, schools, building regulations, clean water, etc.)
But since the government doesn’t know everything you’re doing out in the world, it’s easy to over or under pay your taxes. If you have two jobs (which is very common for many people just starting out) you may not pay the correct amount in taxes. If you have money you’ve invested in the market and buy or sell items for a gain or a loss, the government’s not fully aware of that. If you have a “side hustle” that generates significant income, you’re supposed to report all that income and pay taxes on it.
Depending on how all this adds up, you may have overpaid the government for your taxes. If so, then you get a refund. Or, you may have under-paid your taxes. Therefore you’ll owe money in April the following year.
So, a refund is just a “squaring up of the books” to make sure that everyone has the money they’re properly owed.
There are many philosophies of how many deductions you should claim and how much you should give to the government over the course of a tax year. You can tweak your withholdings to “optimize” how much you take home vs. how much the government holds for you. The closer to “optimal” you get this, the lower your refund will be. You can even setup your withholdings so you wind up owing money every tax season. That’s up to you.
It has always been my philosophy that it is better to have the government owe you money (your refund) than it is for me to owe them. But people’s opinions on that vary.
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