Year-end tax planning can be nerve-wracking. Depending upon the complexity of your tax situation and the amount of money that you earn in a given year, your tax return could be fearfully complex. Whereas many folks who work for a single employer and don’t take many tax deductions might have a relatively straightforward tax-filing experience, those who work at multiple jobs or manage complicated investment portfolios are liable to require the assistance of a professional. Although it can seem costly, retaining a tax preparation specialist can significantly boost the size of your tax refund. Such a move could pay for itself several times over.
When you’re hired at a new job, you’ll need to fill out a Form W-4 and submit it to your employer. Unless you experience a life-changing event like a legal marriage, the birth of a child, or the purchase of a new home, you won’t have to fill out one of these forms each year. If you do experience a so-called “qualifying event,” you’ll simply need to request a new form from your employer. This is a routine procedure that doesn’t need to be done immediately after the qualifying event.
Your exact tax liability will depend upon the information that you disclose on your Form W-4. If you claim several different deductions, allowances or other credits, your federal income taxes will be “withheld” at a lower rate. If you use fewer tax-reducing tools, your withholding rates will be higher. It’s important to note that your Social Security and Medicare taxes will be withheld at a constant rate in virtually all situations. While you might recover a portion of these funds in your tax refund, it’s unlikely that you’ll be exempt from these forms of withholding.
Your total tax liability will also depend upon your total income. In the United States, taxes are withheld on a sliding scale that’s designed to extract more revenue from high-earning individuals. If you earn $40,000 per year, your taxes may be withheld at a relatively modest rate of 15 or 20 percent. If you earn $100,000 per year, your taxes will be withheld at a far higher rate. The highest income tax rate is currently 39.6 percent. Since these rates fluctuate from year to year, it’s important to keep abreast of any legislative trends that may affect them. If you’re unclear about the exact amount of withholding tax to which you’ll be exposed, you should contact the IRS or your state’s revenue service.
How Much Money Will I Get Back on My Taxes?
The size of your tax refund is determined by a breathtaking number of factors. It’s important to remember that you’re not necessarily entitled to a tax refund. While most workers who earn hourly wages or salaries receive ample tax refunds once they’ve filed their taxes for the year, some receive virtually nothing. Some workers may even end up owing the IRS additional funds after accounting for additional earnings.
The withholding process is the principal cause of this uncertainty. When you receive your paycheck for a given pay period, you’ll notice a sizable difference between your “gross earnings” and “net pay” for the period. Your gross earnings figure represents the raw dollar value of the hours that you worked whereas your net pay figure represents the amount left over after your employer’s withholding calculations.
These withholding calculations are done for convenience. Rather than ask you to save the funds to pay your taxes in a lump-sum payment at the end of each tax year, the IRS permits your employer to withhold these funds on a gradual basis. This is a win-win situation: It reduces the amount of money that you’ll have to save over the course of the year and reduces the number of delinquent taxpayers with whom the IRS has to deal.
The funds withheld from your paycheck satisfy several discrete forms of tax. Several of these are intended for the federal government’s use. These include federal income taxes, Medicare taxes and Social Security or FICA taxes. Other withholding streams may be earmarked for your state or local governments. Many states and even some municipalities levy their own separate income taxes. If you live in one state and work in another, you may need to pay taxes in both places. If you live in a city that does not charge income taxes but work in one that does, you’ll probably have to cover those costs as well.
For budgeting purposes, you may wish to get a ballpark estimate of the size of your refund before you actually file your taxes. You can find a free online “tax calculator” on the landing page of your local nonprofit community-finance organization. Most for-profit tax services also offer these free tools.
Try to calculate your estimated taxes a month or two before filing. If you owe additional funds to the IRS or your state’s revenue authority, this will give you time to begin saving.