Updated: Jan 21
When it comes to filing taxes, I predict that you either have a positive or negative outlook for the process. If it is the later, the reason is probably the fact that you usually end up writing a check. A positive outlook is typically tied to how much of a refund you get. I am going try to simplify the process and explain why an amount due is not a bad thing and a giant refund is not necessarily a good thing. I’ll start by breaking the return down into 3 parts.
First, let's talk about what is happening on a tax return. At its heart, if a tax return had one, the only job a tax return has is to calculate how much tax you owe based on your income. So, at this point we are only looking a two things, income and tax. Different types of income are taxed at different rates, so your mileage may vary. Generally, tax will increase or decrease on a percentage based on your income going up or down. Tax should be considered your measuring stick year by year.
The last aspect of your return is to consider your payments. These payments come from paycheck withholdings, quarterly estimated payments, or various credits. If your payments are less than your tax in any year than your will need to pay more. If you paid in more throughout the year than you owe in tax, then you will receive a refund. Imagine yourself at a coffee shop and your order is $7. After handing the clerk a $5 bill, are you upset with them asking for $2 more? Alternatively, are you overjoyed when they hand you back $13 after you paid with a $20?
This simple explanation was not made to be all inclusive and there are many other complexities that go into all three of these parts. But I wanted to share some perspective about the tax return and how you can improve your situation by not focusing on what the commercials are pushing. Most tax problems do not stem from earning more income and the resulting tax increase. Tax problems typically start because there were not enough payments made throughout the year. If you are not paying in enough, change your withholding with your employer or make sure you are budgeting enough to take care of the tax bill.