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 don’t get a refund if you set everything just right, and you won’t owe any when you file either. Everyone who earns money has to pay a tax on their earnings to the government. Your employer sends a portion of your pay to the government every paycheck for the taxes on the money you earned and hopefully they send the correct amount for your situation. What you put on your w-4 form determines that.
If you have the numbers exactly right, then when you file taxes for the year, you will owe 0 and get back 0 because it was paid all year out of your paycheck in correct amounts.
Of course, it’s never perfect, since so many things can throw it off a bit, like interest earnings on your savings account that your employer has no idea about, or you have deductions you can take to reduce your total tax , but the goal is to make the difference between what was paid from your paycheck and the tax amount owed on your earnings as close to 0 as possible.
If you get a refund, that means you overpaid during the year and gave the government a no interest loan they are paying back to you as a refund. If you owe money, then you underpaid your taxes during the year, and the government wants their money plus interest, so you have to pay up a bit more when you file.
You don’t get a refund if you set everything just right, and you won’t owe any when you file either. Everyone who earns money has to pay a tax on their earnings to the government. Your employer sends a portion of your pay to the government every paycheck for the taxes on the money you earned and hopefully they send the correct amount for your situation. What you put on your w-4 form determines that.
If you have the numbers exactly right, then when you file taxes for the year, you will owe 0 and get back 0 because it was paid all year out of your paycheck in correct amounts.
Of course, it’s never perfect, since so many things can throw it off a bit, like interest earnings on your savings account that your employer has no idea about, or you have deductions you can take to reduce your total tax , but the goal is to make the difference between what was paid from your paycheck and the tax amount owed on your earnings as close to 0 as possible.
If you get a refund, that means you overpaid during the year and gave the government a no interest loan they are paying back to you as a refund. If you owe money, then you underpaid your taxes during the year, and the government wants their money plus interest, so you have to pay up a bit more when you file.
You owe taxes based on your total income from everything for the year (and the amount you owe is based on how much you earn). The government “helps” you by taking a percentage from your paycheck.
At the end of the year, you “settle up” by filing your tax return. This is where you report everything (including what was taken from your paychecks), and either:
– you owe taxes because you didn’t have enough paid in all year
– you get a tax refund because you had too much taken out of your paycheck
Most tax pros believe you should shoot for even – meaning you don’t owe or get a refund. But that’s really hard to do because of all the different income sources people have, tax brackets, tax credits, etc.
Assuming you’re in the US a tax refund is the amount of money over your tax requirement that you paid in. Ultimately at the end of any particular tax period you should neither pay or receive any money.
Also realistically unless you are making a ton of money or own your own business there is no reason to include an accountant.
You pay an estimated amount of taxes to the government (typically it is deducted from your paycheck each time by your employer and paid directly to the government).
It’s only an estimate that can’t take into account all the things you might do, like donate to charity, make a bunch of money on a stock trade, etc.
At the end of the year, you calculate the exact amount you should have paid, and either pay the government more money or get a refund for paying too much.
When you got your job, you filled out a W-9 (?) form where you claimed “deductions”. This is just a way to tell your employer how much you are likely to deduct from your taxes at the end of the year so that they can better estimate how much to take out of your paycheck to give over to uncle sam.
You have money taken out of your paycheck each time you’re paid. When taxes are due and everything is factored in, if they collected too much over the year they give you the overage back. If they didn’t collect enough you don’t get a refund, they tell you you owe them more and you have to pay it.
Assuming you are in the US:
1) You don’t need to pay an accountant if you are just a normal W2 worker with some stocks. If you are a 1099 or business owner then maybe it would be wise. But you can use mostly free sites like FreeTaxUSA to do your taxes pretty simply. You’ll get 1099 forms from both your job if W2 and your stock brokerage, and you either upload those documents or enter in the values in the boxes, and then go through the yes/no for asking about certain deductions/credits and you are done.
2) The goal should be to not get a tax refund. You get those when you pre-paid too much in taxes, as maybe you are a W2 worker and you filled out your W4 incorrectly. Now, there are deductions and credits for a ton of stuff, but hopefully your job is withholding a proper amount. If 1099 or business owner then you have quarterly estimated taxes that you should be paying.
Its like when you go to Starbucks and buy a venti mocha cappuccino and its $4.65. You pay with a $5 bill and you get $0.45 back. That is your refund.
In the tax situation, the $5.00 is the taxes that you have paid during they year, plus tax credits or other tax benefits, and the $4.65 is the actual taxes that you owed.
You loaned the government interest free money and they are paying it back because you over paid.
Most people think “hell yeah, I get a refund.”. That is flawed. You want to pay taxes at the end of the year. That means you took home every cent you earned and have to pay then what you owe instead of loaning them money that you could put in a savings account and earned interest for yourself.
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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