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r/personalfinance

I never count on getting a large tax return. It is low because you are getting all your money as you make it instead of letting the government hang onto it interest free until you file for your returns. I consider this a good thing.

Sounds like your witholdings were more accurate this year. That means you had more cash on hand than you might otherwise have had.

Because you did it right. Tax refunds are refunds from overpayment. If you are getting thousands back just from a w-2 then you were over paying and out all that money all year and the government is just settling up.

I put $20 in the extra withheld on a W-4 so you’re saying that was about right to put?

So it’s best to get no money and get more value during your paychecks?

Good to hear!

Seems like it.

I generally get my company to do standard witholdings and then I donate to charity and top up my tax free savings, and so end up getting a nice chunk of money back each year. But that’s just money that really shouldn’t have been withheld in the first place.

Why would be different if I kept that $0. Would I end up owing money instead of getting more at the end of the year?

Yup. If you pay nothing up front, it’s up to you to hold back what you think you’ll need to pay at tax time.

Oh okay I see. It’s more like you decide if you want your money during your paychecks and owe nothing at the end, or withhold more to get more of a refund. Is that kinda correct?

Yup. In low interest periods, there’s no difference. In high interest periods, it’s sometimes more profitable to keep the money yourself and collect interest on it.

But either way, you’re going to have to pay it, so don’t spend it.

Yes - the idea is that you want to hold onto your money, rather than overpaying the government in taxes, only to have the government refund you the overpayment at the end of the year / when you file your taxes. You keep your money.

If nothing changed as to how you’re withholding your paychecks then the other explanation is that the tax codes changed. I heard that this year tax credits were reduced so that may explain. I’m not a tax professional but just check.

Awesome! Thank you for the lesson it’s good to know all this! One more thing. I usually use turbo tax and I’m most certain I don’t owe the irs anything. But turbo says I owe them $79. Is that turbo tax’s fees and such or is that what I owe the irs?

So if I put at $20 withheld on my w-4, that’s better than a $0?

Also keep in mind that Trump’s 2017 tax cuts expired this year so your taxes went back up

All depends on your withholdings, deductions and credits. Typically, most people take the standard deduction as they don’t have enough things to itemize and reduce your overall tax liability. Some people are eligible for tax credits. This is usually how people get back thousands in a refund, without paying in a bunch, during the year.

The idea is to owe 0 and get back 0. This means your withholdings are spot on and you’re getting the most money back in your paycheck during the year.

If you owe, you need to adjust your withholdings, depending upon the amount you owe. Up to you if you want to pay a bill or not. For the people who get thousands back in a refund. It’s not necessarily because they overpaid during the year. It’s usually because they qualify for credits like earned income or child tax credits. It’s additional money. Not money they paid in and is being returned.

Yep, glad someone said that. Bracing for this

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So me putting $20 in my extra withheld isn’t necessarily a bad thing because it balances out?

Yes, you can keep it that way. It won’t hurt you. If you start getting a refund, without applying any credits or deductions, at the time you file, then you can remove the $20. It would be overpaying at that point.

Okay got it thanks so much!

Best to ask someone who uses Quicken products in the US.

Thing is, it sounds like you’re not making enough money to be having to pay for tax returns; you should just be able to do the web-based free filing.

Oh damn foreal? My tax return is close to 8K

Imagine if you invested that money in ExxonMobil throughout the year it would be closer to $12k. That's why you want to avoid big refunds because you miss out on potential gains.

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Exactly you don't want to give them an interest free loan

Bingo

The Trump admin lowered federal withholding.

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One big change that hasn’t been addressed is that you had 2 jobs in 2021 and 1 job in 2022.

Every employer has to take out money for Social Security until you hit a certain maximum. When you switch jobs, the new employer deducts money for Social Security as if you’re starting at $0. It’s possible you overpaid on Social Security in 2021 and were refunded the amount you paid over the maximum. Now that you only have one job, you’re not overpaying Social Security.

https://turbotax.intuit.com/tax-tips/jobs-and-career/changing-jobs/L5ElUIrh6

And /r/USdefaultism

Oh yeah, don't we all... /S

So I had a better year then?

If you get a huge tax refund, that means you overpaid throughout the year and gave the government an interest free loan. If you have a huge tax bill, that means you got an interest free loan from the government, and they'll put a stop to that real quick. If you have no refund and no tax bill, you correctly guessed how much taxes you were supposed to pay.

No, the optimal strategy is to shoot for a $0 refund every year. You can use the IRS's calculator at https://www.irs.gov/individuals/tax-withholding-estimator to try to make that happen.

Just because it is mathematically optimal doesn't necessarily mean it is right for you, though.

If you get a refund at the end of the year you basically gave the government a loan and they are paying it back. You can use that as a kind of hidden savings account if you'd like, and that may be psychologically better in your situation. But financially it is always better to shoot for a $0 refund.

A lot of the COVID related credits have gone away which makes a big impact as well.

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May just seem less because they were bigger last year due to a covid thing. I heard on the news they'd be lower now that it's clearing up

Use freetaxusa. They don’t charge for tax returns. Never pay to file your tax return unless you’re making a goodly amount of money or have a difficult situation.

Good to know! I filed free through IRS app

Those 2017 tax breaks for the middle class have expired

Quit letting the government borrow your money for free. You want to come as close to 0 as possible.

Don’t pick the 1 sector of investments that did the best last year and say “you’ll make 50% returns every year forever, you dummy.” Cause it won’t happen. Track the S&P for steady returns and even with that, you would be down like 13% for 2022.

It was just an example, boss

Cool cool. Imagine if he bought scratch offs and won 10k a week for life! Never have to work again!!

True, that would be dope

Why 0$ ? If we owe money and pay it a credit card with points or cash back do we not come ahead ?

Yes that's better, but you can only really do that if you're making substantially more money every year. There is a penalty for underpaying, so you're risking a penalty if you underpay by too much.

No, because you have to pay a service fee when paying on a credit card. I had to pay last year and decided on the credit card route you pay approximately 2%, so unless your rewards card gets you better than that, you aren’t finding some kind of benefit by paying with a CC.

https://www.irs.gov/payments/pay-your-taxes-by-debit-or-credit-card

That’s a good strategy IF you have a steady income. I work in film. I had 24 different employers this year. I had all my W-2 jobs keep extra, so they’d balance out with my 1099s.

Which… I guess is actually still trying to have the refund/owed be $0, but since I’m guessing and have no idea how much I’ll make each year, I’d rather get a fat refund than owe come tax time.

I know it’s an interest free loan to the gov but I’m shit at saving so it works out okay for me

Boss

I do this last bit. My current job pays better than any of my others. I have a really hard time saving money. So I put some extra toward tax stuff, keeping my money only slightly higher than my normal quality of life, to keep me on a shorter leash. That way my return feels more like an occasion and a chance to buy things I otherwise couldn't have saved for.

If you get paid correctly, you can earn interest on those payments. 3-5%.

Government pays you 0%. They get your money for free.

You miss him because he allowed the tax cuts for citizens to expire while allowing tax cuts for businesses to go on perpetually?

If you are owed a refund and file incorrectly, your money the government still has accrues interest. But the interest only starts accruing after you file incorrectly.

I just got notice that my refund accrued $23.

It was a joke not sure why so many of y’all got to right about it

A lot of the other comments do a good job explaining what you intended to ask. I'd like to add some clarification on terminology since many comments are also getting that part wrong.

Tax return - the paperwork you file to determine your final tax liability for the year.

Tax refund - the amount the government pays you back in case of overpayment on taxes withheld/estimated throughout the year.

Tax owed - the amount you pay the government in case of underpayment on taxes withheld/estimated throughout the year.

The LPT I would suggest is taking some time to learn about taxes overall and truly understand how the system works (especially marginal tax brackets so you aren't one of those people who thinks, "I got a raise that pushed me into the next tax bracket so I actually made less money"; that is impossible, that is not how math works; it all works out when you file your return). This is something that could easily be and should be taught to every student in high school.

Wish it was taught in schools. I’m learning

you want it to be low or zero. getting money back means that you overpaid throughout the year and gave the government an interest free loan.

coming back low or near zero means that all your withholdings are accurate, and where you want to be.

It takes time but especially if you are filing your return yourself, you'll learn eventually. Most people it seems don't even care to learn. You asking this question shows you are probably doing more than most just by thinking about it. Keep it up.

😃

Yes…1000 times, yes!

Awesome glad to hear I did it right then

Instead of paying the IRS an extra $20, participate in your company's retirement plan or open your own IRA account. Pay yourself & reduce your tax liability.

I purposely owe 3-4k a year. It’s never been a problem. I’m not sure where the cutoff is but that amount has been fine.

Simplest way to understand it is to first figure out your tax brackets for Federal, State and Local. It's a progressive rate, meaning that the first $30k you earn is taxed at one percent, the next $50k is taxed at a slightly higher amount, the next $60k is taxes an even higher rate, and so on. If you find the rates, it should tell you the exact thresholds.

Then figure out what your taxable income is. It should show this pretty clearly on the W2.

If you main or lost any money gambling or in the stock market, you can include that too. However, if you earned money on a stock that you held for at least a year, those earnings are taxed at a lower rate than regular income for federal.

If you have dependents, then figure out how much you can deduct or credit from them.

I assume you are probably going to use the "standard deduction", which you can also look up with the tax brackets. Subtract that from your new taxable income.

With your final taxable income minus deductions, you can the use the different federal, state, and local tax brackets to check how much you are supposed to owe. Compare those values to what was withheld on your W2.

If you notice a discrepancy, you can take a look at any of your paystubs. Multiply your gross pay by an amount for it to represent your annual pay. So if you get paid biweekly, multiply by 26. Do the same for each the Federal, State and Local taxes on that pay stub. Compare those taxes withheld against the values you calculated before. They should be pretty similar. If they aren't, then it's because your employer didn't have an accurate value for your dependents or couldn't predict your total annual income when they issued each paycheck.

I had an accounting instructor that lived by 'I always want to pay a little in so I am not doing an non-backed interest free loan to the government.'

Accountant here... exactly.

Think of a tax refund as a 0% loan you gave to the government for a year.

If you fill out your W-4 correctly, it always leans towards breaking even or owing. The intention is not to have you donating money interest free to the government

You don’t want a tax return. If you get a fat tax return you let the govt use your money all year long before giving your tax over payment back.

It also reads that u made a little more money this year than last year. Without knowing how much u made both years, and I'm not asking, but u may have also gone up a tax bracket without realizing it.

Good for you not lending the government your money for free. With Biden’s inflation you would have lost about 10% of it.

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The tax software doesn't highlight the penalty. Do you read through your entire return before submitting? You may be paying a penalty each year without knowing.

If you elected to have $20 taken out of each paycheck in addition to the amount the W-4 calculation came up with then you played that very well.

If you hadn’t taken out that $20 a paycheck and if you’re paid each week you would be about $1000 short of the total tax amount you owe for 2022 and you would have to pay about $1000 by April 15

I find the “new” w-4 to be very confusing. I’m laughing at myself saying “new” as it’s like 4-5 years old now).

What was it like before?

The names are a bit confusing, but a tax return is what you send to the IRS. A tax refund is what money you may receive.

Yes i print out the entire return and review It. Have not been paying a penalty. They also may look at percentages. I pay 50k in federal taxes on average so being short 3k is not a large percentage.

You used to control your withholding by claiming allowances. It was just one number that you could adjust up or down to withhold less or more money (although you could also say withhold $x a paycheck in addition like you did with the $20)

Now it’s that full page - several sections. I guess it is better at estimating what you should withhold but more complicated.

This plus Tax breaks for the pleebs went away recently just not the tops break. Welcome to hell on earth.

It’s always in your best interest to get your money when you’re owed it. The goal is not getting a tax refund and also not owing any taxes.