Let’s go over the most common reasons you do not receive a refund (and why that might be a good thing):
1. Self-Employment Income
Whenever you work for yourself, you are not subject to income tax withholding. Typically, self-employed individuals send estimated quarterly payments to the IRS to cover federal income taxes, Social Security Taxes and Medicare Taxes. When this happens, you are only eligible for a refund if you overpay your estimated tax liability based on your total income for the year or if your income falls in the range that allows you to receive refundable tax credits such as the Earned Income Credit (EIC).
2. Low Tax Withholding
For individuals that work traditional jobs where you receive a W-2, taxes are withheld by your employer. The amount of taxes withheld is determined by the information you enter on the W-4 form. If you chose the correct tax withholding based on your situation, at the end of the year you won’t owe, and you also won’t receive a refund. The best-case scenario in the tax world is breaking even.
3. No Tax Breaks/Credits (or not enough)
The IRS has various tax breaks, or credits, that can be taken based on your personal situation. This is where a knowledgeable Tax Professional can be the difference between a refund or an amount due to the IRS. A Tax Professional can help you identify which tax credits apply to your situation such as the Earned Income Credit (EIC), Child Tax Credit (CTC) and the Additional Child Tax Credit (ACTC) if you have qualifying dependents. Credits and deductions for post-secondary education, such as the American Opportunity Tax Credit (AOTC), Life Learning Credit (LLC) and the Tuition and Fees Deduction can also help increase your chances of a refund or decrease the amount due to the IRS. Please remember that you lose the Child Tax Credits once your dependent child turns 17 during the calendar year.
A tax refund is an interest-free loan (or an overpayment) you made to the IRS throughout the year. Approximately 75% of individuals filing taxes receive a tax refund. The IRS is simply returning the money to you once your taxes are filed. The most common reason an individual receives a tax refund is due to having too much money withheld during the year or a refund for refundable tax credits. If you don’t get a refund and you also don’t owe, then you were able to maximize the usage of your income during the year.
Click here to go to blog about "Ways To Ensure You Don't Owe Taxes At The End of Year."
We hope these tips help to put you at ease during tax time and if you ever have any questions, please be sure to reach out to Rocket Tax & Professional Services for more information. Call us at 713-900-9366 now or click here to request a consultation.