Tax Refunds Vs Tax Liability
Understanding the difference between tax refunds and tax liability is crucial. With tax season on the horizon, you need to file your annual tax return if you have not already. Most people look forward to it as it is during this time that they expect to receive a nice chunk of money back.
Although tax laws change from time to time, it is important to know taxation principles. Data from the IRS shows that refunds have dropped by 8.4%. Besides this, many people who usually receive a refund find themselves in a situation where they owe money instead. You might find taxes to be complicated. However, they are quite straightforward once you get a hang of them. This post takes a close look at the differences between tax refunds and tax liability.
Tax refunds are quite easy to understand. When you receive a tax refund, you are likely to feel very happy. In fact, most people consider it to be a free chunk of money. However, you are simply getting back your own money which you had loaned to the government for zero interest. The principle behind it is that employers withhold a certain amount of your income for taxes from every paycheck.
Now, you must recall when your employer asked you to fill out the W-4 form. It enables your employer to withhold the estimated share of taxes from the paycheck. Thus, the refund that you receive is simply the additional amount that your employer deducted for your withholding minus the actual amount of tax you owed during the specific tax year. Tax refunds are just the difference between your tax liability amount and the amount that your employer withholds from your paychecks.
If more money has been withheld on your behalf when compared to the tax liability, you would receive a refund for it. On the other hand, if less money had been withheld, you would owe money to the IRS. Therefore, the amount of money that gets withheld from each paycheck has a direct influence on the tax refund and determines whether you would receive a small or big refund and if you would owe any taxes that year. At the end of the day, whether you get a refund or owe money, your tax liability would remain the same.
Now that you have a firm understanding of tax refunds, you will have an easier time understanding tax liability and what makes it different. Your tax liability is the amount of money you owe the government in taxes each year. It is determined by your taxable income, filing status, tax bracket, and tax credits. To calculate tax liability, you need to have a taxable income. To have a taxable income, you need to have a higher gross income than your deductions. When you know that your income is taxable and filing status, you can determine your tax bracket and calculate how much tax liability you owe. The higher your income the higher your tax liability.
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Once you have finished reading our post, you will know the differences between tax refunds and tax liability. Make sure to hire us to help you submit your tax return.