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.