Preparing your tax returns is a huge hassle that few people enjoy. But what millions of taxpayers do like is the tax refund check they often get after filing their taxes. Figuring out how much you'll actually get in your refund isn't always easy to figure out, because it depends on how much your employer withheld from your pay throughout the year, as well as on how much you owe in taxes on other income beyond your job. However, for many people who get most of their income from employment, it's possible to generate a good estimate based on just a couple of factors. This tax refund estimate calculator can give you a great starting point. Below, we'll look more at this calculator and the way in which it determines the size of your likely 2016 tax refund.
Withholding vs. taxes owed
Most taxpayers pay their federal income taxes through the money that's taken out of their paychecks through tax withholding. At the end of the year, the majority of taxpayers have had too much tax withheld, and that's what gives them a refund.
Now that 2016 is over, it's easy to get a sense of how much money you've had withheld and how it compares to your total income. By looking at a paystub on your latest check or at the electronic record that your employer provides, you can find the two key numbers you'll need: your gross federal income for tax purposes, and the amount of federal taxes withheld from your pay throughout the year. Just those two figures are sufficient to get you most of the way to a good estimate of how big your 2016 tax refund will be.
Extra information you'll need
However, if you want a more accurate picture, there are some other factors that will affect your taxes. They include the following:
- Filing status. Different tax brackets apply to taxpayers depending on whether they file as single, married, or heads of household. These brackets affect your tax bill and your refund.
- Income from other sources. Income from investments and other outside sources is usually taxable, but it doesn't factor into how much tax gets withheld from your paycheck.
- Contributions to tax-favored retirement accounts. If you contributed to a traditional IRA for the 2016 tax year, it could reduce your taxable income, boosting your potential refund.
- Itemizing deductions vs. taking the standard deduction. If you'll get more than the standard deduction, you'll pay less in taxes.
- Number of personal exemptions and dependent children. Various deductions and credits are available that can cut your tax bill even further.
Using an example
An example can help show how this works. Take a married couple with one seven-year-old child. The couple makes a total of $50,000 and contributes $2,000 to a traditional IRA. $3,000 in taxes was withheld from pay during the year. Each spouse gets one personal exemption, plus their child earns them one more for a total of three.
As the calculator shows, adjusted gross income will be $48,000, or total income less the IRA contribution. Standard deductions and three personal exemptions will take taxable income down to $23,250, and that will produce taxes of $2,560. However, the child gets a child tax credit of $1,000, making the final tax bill $1,560. Because the amount withheld was more, at $3,000, the difference of $1,440 is the anticipated tax refund.
Note that this calculator doesn't necessarily include all of the credits and other tax breaks to which you might be entitled. However, by providing an estimate, you can at least use the calculator to help you start planning for what you might want to do with your refund when you get it in early 2017.