Calculate Your 2014 Tax Refund Now

Source: 401kcalculator.org via Flickr.

Even though we still have a long way to go until tax time, you can get a pretty good idea of the tax refund you can expect to get once you file your return next year.

There are three basic components that go into how much you can expect to get back: your income, any deductions you're entitled to, and any tax credits you qualify for. If you know what to expect in all three categories, you should be able to come up with a pretty good estimate of your 2014 tax refund.

Income
This is usually the easiest part to figure out, especially if you're salaried. And don't forget to factor in any bonuses, dividend income, and other business or investment income.

If you're an hourly worker, a good estimate is to take your hourly wage and multiply it by the number of hours you work each day, and again by the average number of days you work per month. Then multiply the total by 12 to get a good estimate of your annual income.

For an example of how to calculate your total income, if you earn a salary of $60,000 per year, received a bonus of $5,000, and earned $5,000 in net income from an investment property you own, this part of the formula is $70,000.

Deductions
The first decision you'll need to make is whether to accept the IRS' standard deduction or to itemize your deductions. For the 2014 tax year, the standard deduction amount is $6,200 for single taxpayers and $12,400 for married taxpayers filing a joint return. Fortunately, if you use a tax software program like TurboTax, it will usually make that decision for you based on which option offers you the better refund.

Now, it's impossible for me to list every potential deduction here, as there are hundreds of them, but some are very common. For example, mortgage interest is a deduction taken by many home owners, as are real estate taxes. Charitable donations are another common deduction, as are unreimbursed employee expenses. For a helpful list to get you started, here is a good one from TurboTax.

It's also important to differentiate between above-the-line and below-the-line deductions. Most are below-the-line, which means you can only take the deduction if you choose to itemize. However, there are a few deductions you can take whether or not you choose the standard deduction.

Some above-the-line deductions include qualified contributions to a traditional IRA, retirement savings for self-employed individuals, student loan interest, moving expenses, and educator expenses. All of these are immediately subtracted from your income, regardless of your deduction method, and result in what's referred to as your "adjusted gross income (AGI)."

And, although it's not technically a deduction, the personal exemption also reduces your taxable income. For the 2014 tax year, you're entitled to claim a personal exemption of $3,950 for you, your spouse, and each of your children. These begin to phase out if your AGI is above $254,200 ($305,050 for married taxpayers) and disappear completely above $376,700 (or $427,550).

Credits
A tax credit works differently from a deduction in that it simply lowers the amount of your tax, dollar for dollar. For example, if, after taking all of your deductions, you determine your tax is $5,500 for the year, and you have $1,500 in tax credits, it reduces the amount of your tax to $4,000.

There are a bunch of potential tax credits, but the most common are the Child and Dependent Care Credit, the American Opportunity Credit, and the Lifetime Learning credit. Depending on your income and expenses, these credits can be worth several thousand dollars per year.

Tax calculators you can use
There are hundreds, if not thousands of possible tax deductions and credits, so it may seem nearly impossible to calculate your tax refund on your own.

Fortunately, there are some great tax calculators out there that can help, such H&R Block's. Intuit's TurboTax has an excellent calculator called the TaxCaster, but it hasn't been updated for the 2014 tax year yet.

However, if you use one of these, bear in mind that they only take into account the most common deductions and credits. So you may actually receive a lowball estimate of your tax return, depending on what specific tax breaks (if any) you qualify for.

Is your refund too high?
Now, this may sound like a silly question at first. After all, how can you get too much money back from the government?

Well, if your refund is very high, it could mean your withholding is out of whack. How many exemptions did you claim when you filled out a W-4 for your employer?

The problem is, by letting the IRS withhold too much from your paychecks in anticipation of a big refund, you're essentially giving the government an interest-free loan. While this may be a decent strategy if you're particularly bad at saving money, ask yourself this question: Would you rather have $5,000 (or whatever your refund is) all in one lump sum, or would it help you more in your daily life to have more than $200 extra on every paycheck?

It's never too early to start thinking about maximizing your tax return. Figure out what deductions and credits you qualify for now, and you could have a hefty check in hand before many people have even filed.