Let's Talk About Tax Refunds
By now, most people who are filing their taxes and expecting refunds have already filed. For tax preparers, we like to see taxpayers end up either receiving a refund or owing in the neighborhood of $100. That is just about perfect in our world. However, thousands of people count on receiving large tax refunds.
Tax refunds are made up a variety of elements.
They can be a return of funds you have paid as tax withholdings, refundable portions of tax credits such as the Additional Child Tax Credit and the American Opportunity Credit for the first four years of undergraduate education, as well as the Earned Income Tax Credit (EITC), plus other elements.
The only portion of a tax refund that is not a result of funds paid out of pocket by taxpayers (either by withholding, paying for school, or paying to care for children) is the EITC. It can be quite a large payment.
Because refundable credits are highly valuable, they are ripe for fraud. The IRS has regularly been cracking down and closely evaluating tax returns that have these credits. In fact, for 2016 tax returns filed in 2017, with the credits mentioned above, the IRS delayed releasing refunds until at least February 15th for those who filed earlier in the filing season. The IRS is continuing to match information against third party reporting in a continued effort to combat fraud.
Some reasons why people like to get large refunds:
- They know they will not save their money if they get a little at a time in their paychecks
- Their spouse will spend it
- It is their vacation money
- They are not sure how much they should be withholding in the first place
Ultimately, it is up to each individual or family as to how to manage their money, but there are tools out there to help determine how much withholding should be taken from an individual’s paycheck. Bankrate and IRS both have calculators that allow you to enter your family and income details for a great estimate and details on how to complete a W-4 form for withholding.
It is also important for families to understand how a new job or self-employment could impact taxes and the related credits, especially if a large refund is something that is counted on for day to day living.
On a final note,with a new administration there is always going to be talk of tax reform, and this administration is no different. One difference however, is that there is a majority in both the house and senate of the common party of the sitting President. With this, there could be significant changes to the tax code on the horizon. Drop me a line if you have any questions regarding any tax news you see in the coming months. I will be happy to help.