Are Tax Refund Estimators Accurate?
Are Tax Refund Estimators Accurate?
Tax refund estimators work by subtracting the withheld federal income taxes from the total due income taxes in a year. You will receive a refund if you have more money withheld compared to the amount of taxes you owe. Different factors determine the amount of tax payable and the refund received.
There are mathematical formulas for calculating your tax refund. They entail completing certain computations for you to get the figure. However, you may get it wrong when you miss out on certain portions of the computation. That is why most people prefer using tax refund estimators. But, are they accurate? Keep reading to find out.
What Is a Tax Refund?
When you pay taxes to the federal government or state government, there are cases where you may end up paying much more than you owe the government. In that case, you are liable to receive a tax refund, that is, you should receive a reimbursement.
Most taxpayers view a refund as though it is a bonus or some stroke of luck. However, that’s far from the truth. Tax refunds mostly represent an interest-free loan that you made to the federal or state government. Such loans are mostly avoidable by accurately completing your Form W-4 and ensuring it is up to date. If you are self-employed, you can avoid overpaying your taxes through an accurate estimation of how much you owe the government.
When discussing tax refunds, you need to factor in refundable tax credits. The majority of tax credits are not refundable. In such a case, the taxpayers who do not owe anything forfeit the remaining tax credits. However, there are some exceptions to consider:
- The child tax credit is a maximum of $2,000 and can be refunded up to $1,400.
- The American opportunity tax credit is available to taxpayers for offsetting qualified higher education expenses. In this case, the taxpayer minimizes their tax liability to $0, allowing them to utilize the whole portion of the $2,500 tax deduction. Any remainder is taken as a refundable credit.
- The earned income tax credit (EITC) in which case the taxpayer meets certain criteria determined by income and number of family members.
- The tax year 2020 has a maximum EITC worth $6,600 for qualified taxpayers with at least 3 children.
What Makes You Get a Tax Refund?
Receiving a tax refund is not a stroke of luck. Neither is it a bonus. It comes about due to a range of factors such as:
- Errors made by the tax payer while filling the IRS Form W-4 help determine the correct amount of withheld taxes from an employee’s paycheck.
- Failure by the tax payer to keep Form W-4 updated for it to have a higher withholding and larger tax refund during taxation.
- A taxpayer knowingly fills the W-4 Form in a way that gets them higher tax refund during tax time.
- The taxpayer qualified for refundable tax credits which would have reduced the tax owed to zero. The excess tax amount is returned in the form of cash.
- A self-employed individual or freelancer who needs to do quarterly tax filing may have overpaid to overcome the laborious taxation process.
In any of these cases, you can use a reliable tax refund estimator to see how much you should get.
How to Calculate Tax Refund
You can calculate your tax refund on your own. However, the process is often confusing for those who do not have a financial background. Most people find the process confusing.
The truth is, it’s a simple process. Once you have your taxable income, you go over the tax tables for details of your total income tax for the year. Make a comparison between this amount and the actual amount paid throughout the year. If the total tax paid surpasses your tax, you are liable for a refund as per the difference.
Before you can begin calculating the tax refund, you need access to the right documents that allow you to accurately complete the process. These include:
- Personal details – Taxpayer’s age, marital status (filing as single or married), number of dependents, age of your dependents.
- Earning details – Income earned before taxation, amount claimed in deductions, retirement plan contributions, taxes paid or withheld in the year. Important deductions that you may want to consider include student loan interest deductions, child tax credit, and home office deduction.
- Business expenses – Taxpayers working from home might have a chance to claim it on their taxes or claim exemptions. Do not forget that for business owners, business taxes are filed separately. Alternatively, you would be required to account for the income on your personal return.
- Additional details – Do not forget additional details like donations, medical expenses, student loan interest payments, childcare costs, mortgage interest, and more.
Can Tax Refund Estimator Help?
Yes, a good tax refund estimator/calculator can be used to accurately determine how much refund you should receive. You can consider several calculators such as:
- H&R Block
The model of operation for each calculator may vary, but they generally need the same information. As you choose your preferred calculator, it is important to have with you all the required documents. Failure to do so may result in more time spent computing your refund or end up with an inaccurate computation.
The tax estimator will ask you to answer a couple of questions in addition to your income and expenses before estimating the expected tax refund for the year.
What Can You Do With a Tax Refund?
Your tax refund can help give your finances a quick boost. Whereas it is not a direct ticket to richness and wealth, they can help you pay for small upcoming expenses or a nice night out.
Consider using your tax refund for any of the following:
- Creating an emergency fund
- Adding it to your savings
- Paying off small debts
- Seeding the college fund
- Kickstarting your career by paying tuition
- Prepaying your mortgage
- Making some important home improvements
- Purchasing a life insurance