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
When you started work you completed an IRS form called a W-4. This lists how many exemptions you will claim and your marital status. The amount of income tax you’re going to owe varies depending on these numbers.
Your employer uses this data to determine, on a per-paycheck basis, how much you’re likely to owe the IRS for the year. Your employer “withholds” (subtracts) this from your pay and periodically sends that amount to the IRS in your name, where it accumulates for the year. Even though your taxes are actually due on April 15 of the following year, the IRS, through your employer, is essentially putting you on a pay-as-you-go plan by taking the taxes out of each paycheck.
At the end of the year, your employer will give you a form called a W-2. This lists the money you made during the year and the amount of tax that’s been withheld and already paid.
The formulas for withholding are designed so that you come close, at the end of the year, to having paid all of the tax you owe through withholding. You’re supposed to pretty much break even. However, everyone’s situation is different. If you have a second job or have investment income, you’ll probably owe more than what was withheld. If you have no other income but have deductible expenses (like mortgage interest) then you will have paid more income than you owe.
At the end of the year, you (or a paid tax preparer) fill out the tax forms and calculate what your actual tax bill is. if you had more deducted than what you owe the IRS, you get a refund. If less, you owe money to the IRS and need to pay them along with your tax return.
Because the refunds don’t pay interest, it’s best to try to break even.
Some people will change their W-4 to claim 0 deductions or pay a little extra each paycheck so that they are assured a refund, kind of a self-forced savings account. This is legal and acceptable. It is NOT legal to claim extra exemptions to reduce your withholding to get a bigger net paycheck after taxes. Doing this will mean that you owe a lot of tax at the end of the year which often people can’t afford.
EDIT: Changed form from incorrect W-9 to correct W-4.
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