Key Takeaways
- When you file your individual income tax return, you may look forward to receiving a tax refund or worry about owing additional tax.
- A tax refund is not free money, but a reimbursement to taxpayers who have overpaid their taxes.
- If you get a refund, it is often because your employer withheld more than your total tax liability from your paychecks throughout the year.
- Withholding is the portion of your income your employer takes out of your paycheck and sends directly to the government on your behalf.
- Refunds can also result from refundable tax credits.
- While it may feel good to receive a refund, it does not represent your tax burden—the tax liability you actually owe to the government.
- Your total tax burden is based on your income, deductions, exemptions, exclusions, and tax credits.
- Your tax burden can be higher or lower than what you paid during the year through withholding or estimated tax payments.
- If you want to know your true tax burden, look at your tax forms to see your total tax, not your refund or amount owed.
Transcript
Imagine you file your taxes one year and get a refund. The next year, you owe.
Does this mean your tax burden—the total amount of taxes you’re on the hook for—went up? Well, not necessarily.
The refund or the bill you get at filing time mostly reflects how accurately your employer withheld taxes from your paycheck, or if you’re self-employed, how accurate your estimated payments were throughout the year.
They don’t tell you your total tax burden or whether or not your taxes went up or down.
Your total tax burden depends on your income, deductions, exemptions, exclusions, and tax credits. It can be pretty complex to calculate.
But what does your total tax burden have to do with whether or not you get a refund?
When you get a refund, that usually means too much was withheld from your paycheck. You actually paid more taxes than you owe, and now you’re getting that overpayment back.
You could also receive a refund from refundable tax credits. For example, if your tax burden before credits is $500 and you qualified for a $1,000 refundable tax credit, you would owe nothing AND get a $500 check from the government.
When you do owe at the end of the year, that doesn’t necessarily mean your taxes went up. It just means you didn’t withhold enough income taxes throughout the year.
If you want to know your true tax burden, and whether or not your taxes went up—look at your total taxes paid—not your refund or your balance due.
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