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For years I've wondered exactly why 'Uncle Sam' returns people income rather than keeping it all, most people tell me to keep things balanced out. Well going back to high-school, I remember a teacher of mine would always say getting a tax-return isn't necessarily a good thing and that he'd rather put money in. He never explained why, but it's been on my mind for literally years. The only thing I can imagine is he rather have a larger check monthly than giving Uncle Sam money. But anyways, I just want the logic behind tax returns. Why does the IRS truly return our taxes? How much percentage do they return of our taxes? Why is it considered a bad thing to have large tax-returns? And how exactly do people owe the IRS money, I don't know how to not pay the IRS taxes if that makes sense.
Thanks in advance for the responses and I look forward to being educated on the matter.
I've seen plenty of people get returned taxes of anywhere between $5,000-$7,500, is there a limit in place for how much people can get back? Say someone such as Tim Cook puts in a few million, could he possibly get a million dollar tax-return or is there a limit?
How is a loan if the money isn't even used? I think it's more like they took too much, now they have to give some back. But why doesn't the govt just take out the correct taxes in the first place?
How is a loan if the money isn't even used? I think it's more like they took too much, now they have to give some back. But why doesn't the govt just take out the correct taxes in the first place?
Because they're not psychic. Not to be rude, but that's basically what it amounts to...you list your "dependents" on your W-4 when you are hired onto a place, they deduct a set amount. At the end of the year, depending on whether you chose the right amount of dependents and the amount of deductions you're allowed to take (new child, credit towards education or health care expenses, etc), the amount you actually owe is readjusted and you either owe them (didn't have enough taken out) or they owe you (they took out too much).
Most people have their deductions configured to the point they at least don't have to pay at the end of the year if they're privately employed. If you're an independent contractor or business owner, you usually have to pay regardless. So really if you have too much taken out of your check, the IRS is holding your money without interest for the year, which may be why your teacher said he'd rather pay after the fact.
Because they're not psychic. Not to be rude, but that's basically what it amounts to...you list your "dependents" on your W-4 when you are hired onto a place, they deduct a set amount. At the end of the year, depending on whether you chose the right amount of dependents and the amount of deductions you're allowed to take (new child, credit towards education or health care expenses, etc), the amount you actually owe is readjusted and you either owe them (didn't have enough taken out) or they owe you (they took out too much).
Most people have their deductions configured to the point they at least don't have to pay at the end of the year if they're privately employed. If you're an independent contractor or business owner, you usually have to pay regardless. So really if you have too much taken out of your check, the IRS is holding your money without interest for the year, which may be why your teacher said he'd rather pay after the fact.
This is a good explanation, but if it still sounds confusing, you're not alone because the tax code was MEANT to be stupid and confusing. If you make a mistake and they want to get you on some other crime, they can alway fall back on tax evasion because everybody will have some kind of error in their tax return eventually.
So many special interests have tinkered with the tax code so many times over the years that the tax code is literally thousands of pages long and no human being can realistically be expected to understand it all (let alone file a return that is 100% accurate) because the tiny details are mind-boggling when you start calculating deductions, credits, etc. Not only that, there are portions of the tax return that ask you to choose more than one way to calculate certain deductions. They literally ask you to use one of 2 (or 3?) different mathematical formulas! It's insane and inconsistent.
Go to 3 different tax preparers and they may calculate 3 different dollar amounts that you owe. I've had this happen to me. I know preparers at the big "tax mills" like H&R Block do not know what they are doing. Good luck.
How is a loan if the money isn't even used? I think it's more like they took too much, now they have to give some back. But why doesn't the govt just take out the correct taxes in the first place?
Variables.
You choose how many deductions you take on your W-4.
You manage your own tax burden.
Your employer assists you based on your choices of deductions, extra withholding, etc.
When I was poor, I took out zero deductions so that I'd get a big refund and buy windows or other necessities for my house or pay extra on the mortgage.
How is a loan if the money isn't even used? I think it's more like they took too much, now they have to give some back. But why doesn't the govt just take out the correct taxes in the first place?
They will if you just tell them your exact income for that year, all your planned and unplanned life situations (including medical expenses and investment performance) and your retirement and charity contributions on January 1st with no plans to deviate from what you tell them.
First off you should get your terminology straight. A tax "return" is the form you fill out by April 15 and send to the government. A tax refund is the check you get back if your withholding over the year was more than your tax bill.
The explanation is simple: If you receive income through employment you have taxes withheld from your paycheck. This tax withholding is based on an estimate of what you are likely to owe if your income is consistent throughout the year. It is only an estimate, however, and doesn't take into account such factors as the amount of non-wage income you have, and especially the amount of deductions and credits you will have. These include such things as interest on your home mortgage, property and other state and local taxes, charitable contributions, medical expenses, capital losses, and casualty losses.
This means that your tax bill is likely to be either more or less than what was withheld from your paychecks through the course of the year. If your tax bill is higher you need to pay, if it is lower you get a refund.
Every year around here we see comments from people complaining about their taxes based on how much they had to send in with their tax return, which makes them feel their taxes are too high. Often they don't realize that it is no indication of the size of their tax bill.
As for the question of the "interest-free loan to the government", again it's pretty simple. If you get a refund of, say, $1,200.00 that means that over the course of the year the government had the use of that money even though you wound up getting it back without interest. You could have had less withheld and had that money during the year, rather than all at one shot.
Of course, in current conditions interest rates are very low, so the value of the loan to the federal government isn't very high. It would be twelve months' worth of interest for the $100 withheld in January, eleven months' interest for the $100 withheld in February, down to one month's worth of interest for the $100 withheld in December. (Actually it's a few months more because you don't get your refund in January, but this is a straightforward way to understand it.) It wouldn't amount to a lot of money, but still there are reasons to think you'd be better off to arrange things so you get a smaller refund and have the use of the money each month, rather than at tax time.
If you want to avoid getting a large refund you can tell your employer to change the amount it's withholding from your paycheck. Or alternatively, if you found yourself with a large balance to pay you can do the reverse and increase your withholding.
For years I've wondered exactly why 'Uncle Sam' returns people income rather than keeping it all, most people tell me to keep things balanced out. Well going back to high-school, I remember a teacher of mine would always say getting a tax-return isn't necessarily a good thing and that he'd rather put money in. He never explained why, but it's been on my mind for literally years. The only thing I can imagine is he rather have a larger check monthly than giving Uncle Sam money. But anyways, I just want the logic behind tax returns. Why does the IRS truly return our taxes? How much percentage do they return of our taxes? Why is it considered a bad thing to have large tax-returns? And how exactly do people owe the IRS money, I don't know how to not pay the IRS taxes if that makes sense.
Thanks in advance for the responses and I look forward to being educated on the matter.
I've seen plenty of people get returned taxes of anywhere between $5,000-$7,500, is there a limit in place for how much people can get back? Say someone such as Tim Cook puts in a few million, could he possibly get a million dollar tax-return or is there a limit?
It's very simple actually.
Taxes taken out f your check are based on set percentage. What cannot considered prior to those taxes are deductions, mortagae interest, donations, other income, changes in dependents, medical, dental, catastophic losses, etc.
So, you pay a set percentage, and at the end of the year, put them on paper along with deductions, and then a figure of how much should be returned to you, or in some cases, paid by you.
The reason it's a bad thing for YOU is, if the amount of money to be returned is large, then the intrinsic value of that money is less than when you earned it due to inflation, and your spending power is reduced. Had you had that money during the year, and bought something, chances are costs would be less. If you were able to save the money, you would have been able to earn interest on those funds, that you are not getting now.
Some people OWE money. The reason is, possibly claiming deductions so less money is withheld from their checks, garnering a deficit on their income taxes at the end of the year, changes to their deductions, other earnings not accounted for during the year such as income from stocks and bonds, etc.
Taxes taken out f your check are based on set percentage. What cannot considered prior to those taxes are deductions, mortagae interest, donations, other income, changes in dependents, medical, dental, catastophic losses, etc.
So, you pay a set percentage, and at the end of the year, put them on paper along with deductions, and then a figure of how much should be returned to you, or in some cases, paid by you.
The reason it's a bad thing for YOU is, if the amount of money to be returned is large, then the intrinsic value of that money is less than when you earned it due to inflation, and your spending power is reduced. Had you had that money during the year, and bought something, chances are costs would be less. If you were able to save the money, you would have been able to earn interest on those funds, that you are not getting now.
Some people OWE money. The reason is, possibly claiming deductions so less money is withheld from their checks, garnering a deficit on their income taxes at the end of the year, changes to their deductions, other earnings not accounted for during the year such as income from stocks and bonds, etc.
As you all can see, I'm no tax-genius. Lol so what you're essentially saying is when my employer have me my W-4 (I believe that's the form) and it allowed me to fill my deductions, the deductions aren't being taken out yet until its tax-season? Ie: I made $32k this past year, I had a few deductions such as being independent, etc, my check will stay the same even with those deductions but when tax-season comes they are factored in, resulting in a refund? Maybe this is just one of those topics I'll never understand.
My tax rate is something like 35% I believe, and as stated above my income was a little north of $32k last year. I plan on filling my taxes sometime next week, and I expect to get a refund of about $1,300 according to my last estimate. I'm not sure exactly if I like receiving a refund or not based on the responses. Although I save a decent amount of my money, I also am a heavy spender so if my check was larger because I'm withholding some taxes then I'd probably continue to save the same amount but spend more. So I think Id rather have a check annually that I can just throw into my savings rather than just spending more and saving the same. But that's just me.
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