Tax myths – a refund is not a bonus

March 31, 2014 by Carol Thompson, EA
Cube with Tax words on written on it

A refund is NOT a bonus and a balance due is NOT a penalty.  When you began working, you filled out a W-4 stating how many exemptions you wanted.  If you are getting back too much money or are paying the government at the end of the year, chances are, you filled out your W-4 incorrectly.

For example, a couple is married and has three children. They both work, and both filled out Form W-4’s by following the instructions on the worksheet. They each included the other spouse and all three kids. That’s 10 exemptions.  When they file their tax return, they will have 5 exemptions on the return, but withheld as if it were 10. If they do not have other deductions, such as owning a house, it is possible they can end up owing money.

A W-4 is a guideline. It is not a rule. The best way to calculate withholding is to look at your total tax liability and divide it by pay periods.  Break-even is the tax liability divided by your pay periods.  People are paid in several ways:  weekly (52), bi-weekly (26), semi-monthly (24), or monthly (12).  Say your tax liability is $12,000.  You are paid semi-monthly, so divide $12,000 by 24 = $500 per pay period to break even.

You can now manipulate the withholding into a refund or take it right to break even.  (There are penalties for underpaying your tax.)  If you want a slightly larger refund, take fewer exemptions.  Better yet, go for break even and invest the money.

You can ask your payroll department for a new W-4 at any time. Don’t be afraid to change your withholding to fit your life. Those big refunds are great for paying bills, but if you had the money in your hand, you probably wouldn’t owe the bills to begin with.

Recent Articles

irs agent examining a tax return
Besides official IRS examinations, the IRS also conducts other types of tax reviews that are not classified as official audits, and these are far more common.
Tax Credits
Non-refundable credits can reduce your tax liability to zero. Refundable credits can give you money back if the amount of the credit is more than you owe.
four people making a business deal
When it comes to the deductibility of business expenses the answer is likely to be “Yes, No, Maybe So, or Not Now.” Here are a few examples to consider.
401k nest egg
401k loans aren't reported on your federal tax return unless you default on them. Then it becomes a distribution and subject to the rules of early withdrawal.

Recent Articles

irs agent examining a tax return
Besides official IRS examinations, the IRS also conducts other types of tax reviews that are not classified as official audits, and these are far more common.
Tax Credits
Non-refundable credits can reduce your tax liability to zero. Refundable credits can give you money back if the amount of the credit is more than you owe.
four people making a business deal
When it comes to the deductibility of business expenses the answer is likely to be “Yes, No, Maybe So, or Not Now.” Here are a few examples to consider.
401k nest egg
401k loans aren't reported on your federal tax return unless you default on them. Then it becomes a distribution and subject to the rules of early withdrawal.
This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. TaxAudit does not warrant or guarantee the accuracy, reliability, and completeness of the content of this blog. Content may become out of date as tax laws change. TaxAudit may, but has no obligation to monitor or respond to comments.