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
You would have to read the form they/you prepare to see what’s going on
Chances are you either paid more than you owe already, have a child, are eligible for the Earned Income credit, and/or have some other tax credit paying off a lot of what you owed already.
The government gets reported things like your income and how much is withheld from your paychecks. But there are a lot of things it doesn’t know. It doesn’t know how much you gave to charity, doesn’t know if you spent money on a house, if you paid student loans, invested in an IRA, etc. So they only way you know is if you tell them.
That’s what “doing your taxes” is. You gather all the information, determine the EXACT amount you should have paid, and settle up. They way it functions you USUALLY get money back, but not always.
You are required to file a tax **return** by April 15th. This is the 1040 form (plus others if it is complicated) where you state how much you made and what deductions you have that figures out how much in taxes you need to pay for the year. You also total up the amount of taxes that you paid (your work takes money out of each paycheck) and certain credits (Child tax credit, earned income tax credit). After doing the math, you end up with “you owe this much” and “you have paid this much” if the amount you owe is less than what you paid, you get a tax **refund**. Otherwise you need to send the IRS what you owe.
You do not need to go to an accountant to file your tax return. You can do your taxes yourself or you can use software like Turbo Tax. If you make less that $73,000, you can use [IRS Free File](https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free)
You probably need to repeat the process for your state taxes.
For stocks, you only owe taxes on dividends received and net capital gains (sell price – buy price). If you sell stocks after holding for longer than a year, you owe taxes at the long term rate which is lower than normal income tax rates
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.
Every year you owe a certain percentage of your income to the government. When your employment starts you fill out a form and your employer will withhold some tax from each paycheck. This amount withheld is usually pretty close to how much tax you will eventually owe at the end of the year. Say you made 50k and your employer gives you 40k and sent 10k to the government for taxes. But there is more that goes into how much tax you owe than can be fully figured out with just a short form you give your employer, that 10k amount is a rough estimate. When you actually do your taxes every year, there are things that can add or subtract from your taxes you owe. Maybe you sold some stock and need to pay taxes on that income or made interest at a bank and that needs to be taxed but none was withheld, or you have a child which comes with a tax credit so you owe less taxes or you have student loans and a portion of the interest you paid is tax deductible. There are a good number of things that can impact it, but if you have a fairly normal income situation there aren’t that many and it’s pretty easy to figure this out on your own with the help of some often free online software.
For most people, you go through all the things that need to be added or deducted from your taxable income, and find that you aren’t really adding much or any income, and you have some things you can deduct, so you end up owing less than the 10k in taxes you already paid, so when you file your taxes the government gives you a refund of the difference.
Assuming you live in the United States:
The government doesn’t trust you to pay all your taxes at once at the end of the year. It’s nothing personal; they don’t trust anyone. So every time you get a paycheck, your employer “withholds” some money for taxes. If you look at your paycheck, you’ll see how much they are taking. They send it to the IRS.
When you first got a job, you filled out a sheet saying things like whether or not you were married. Your company then used a formula to guess how much money you would owe in taxes, and they try to withhold about that much.
However, that formula is sometimes wrong. Say your job withheld $5000 in taxes last year. At the start of the next year, you file your taxes and figure out you only owe $4500. The IRS then says “thanks, buddy, here’s your $500 back.” Your refund is basically getting back money you already gave them.
If you make very little money, you might also qualify for bonus money from “refundable” tax credits. The big one is the [Earned Income Tax Credit](https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc). Basically, you can make so little money that you owe negative taxes. So if your job withheld $1000, but you end up owning -$500 after the tax credit, you get a check for $1500. That’s the $1k you paid them plus $500 from Uncle Sam.
Welcome to the working world.
Here are some key points.
– Every year you have to pay income tax based on your whole years income.
– You also get some tax credits (discounts) for things like tuition or retirement investments.
– Your workplace is required to withhold a portion of your pay cheque and remit that to the government so that you do not have a huge tax bill at the end of the year.
Now your workplace will do an approximation of how much they need to take away from your pay to cover your taxes. But they do not know your full financial situation. So for most people they withhold the money like you’re a single person with no tax credits. But most people have some credits for various things.
During April you should file your taxes for the previous year to right size what taxes you have paid. And often that means you’re informing the government of credits you have and therefore are owed some of the money back your employer withheld. On the other hand you may owe more money if you have two jobs or have side income from a personal proprietorship.
**TL;DR:**
-The government bills you for taxes once at the END of the year
-Most people don’t want to pay one big bill at the end of the year, so they pay a little bit of their tax bill out of each paycheck, based on the estimate of what they should probably owe at the end of the year.
-Most people OVERPAY on those paychecks, just to be safe, because they’re rather have paid a few dollars over and get it back at the end of the year, than pay a few dollars under, and get a bill at the end of the year.
-There are also lots of little life events or special programs that the gov will give you a discount on your taxes for.
-“Doing your taxes” at the end of the year is sending in the forms to show What you paid already, and what you should actually owe for the year.
**IF**
What you paid = MORE what you should actually owe (including any discounts you claimed) then the government sends you a REFUND for the amount you paid that was more than you actually needed to pay.
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Longer answer:
Everyone pays a portion of their taxes to the government.
Instead of paying a big bill at the end of the year (which would not be practical) almost all people pay the taxes out of every pay check.
If you look at your paystub every pay check, this is whats listed as taxes.
But this number is just an ESTIMATE of how much you owe. The government actually does the math at the end of the year for how much you really owe. You are paying every check based on how much you THINK you will probably owe. (That’s why this is called tax “withholdings” They are taking your pay and holding some back, to cover what you will owe at the end of the year)
Its based on flat percentages, so the math should almost always be even, except there are some things that change over the year that the didn’t get predicted, that will make you owe less money than you expected to owe.
-Did you have certain expenses come up that year, that the government lets you reduce your tax payment for? (charity, medical bills, car expenses, work expense?)
-Did you do something the government WANTS you to do that lets you claim a special credit? (college? buying a house in an area they want people to buy in, installing solar on your house, etc)
-Did the government just decide they WANT to give everyone some money back? (sometimes, the gov looks at how much total money they are going to get for the year and how much they are going to spend, and decides “ok, we’ll have a little extra, and it would be good for the economy if we passed that out to all the families in America so they can go spend it, so it will help the sales numbers)
Finally, *MOST* people choose to pay their paycheck by paycheck taxes estimating slightly OVER what they’ll probably owe, not under. By default this is how most places set it up. Because again, its an ESTIMATE on how much you need to pay, and most people would rather overpay a little every 2 weeks and get money back at the end of the year, than under pay every 2 weeks, and get stuck with a big unexpected bill at the end of the year.
So at the end of the year you have the amount you actually have been paying (withholdings) and you have the amount you actually owe minus any discounts, credits, rebates you qualify for.
Doing taxes at the end of the year is filing all numbers so the gov can see them. If the amount you paid is more than the amount need to pay for the year, they send you a refund for the rest.
The government takes money out of each paycheck based on what they think you’re going to owe each year. If you just have regular income and don’t have any major deductions, then the amount they withhold from each check will be pretty accurate. But if you have other forms of income (or if your income is variable from check to check) or a lot of big deductions then it’ll be off. The point of filling a tax return is reconcile what the govt took throughout the year with what you actually owe, and either pay or get a refund for the difference.
If you’ve just started working, you probably don’t need an accountant. Try the IRS Free File option first. If that spits out a huge payment or refund, then get somebody to check it over for you.
In many countries, they just take the right amount of taxes in the first place. Tax refunds in the US are a scam perpetrated by the tax software people.
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