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Six simple steps to estimate your tax refund
After you have filed your return, the amount that you can expect to receive from the Internal Revenue Service (IRS) or your state tax authority is known as a tax refund. The amount of the taxes that you have paid in advance and the tax credits that you are eligible for is the amount of the tax refund.
Step 1 – Calculate your income
In order to know your estimated tax refund, you are required to gather all the documentation of the taxable income you have for the year. This income includes commissions, salary, bonuses, and any other compensation that you receive from your job. It also includes the money received from renting a property, gambling wins, returns on investments, and so on. However, transactions like workers’ compensation benefits, income from scholarships, welfare benefits, and child support are not considered as taxable and hence are not included in the overall amount. Additionally, ensure that the income that you have mentioned is for the entire year, as the refund and tax liability are calculated on a 12-month basis.
Step 2 – Standard deduction or itemization
The common itemized deductions or standard deductions usually include real estate taxes, mortgage interest, student loan interest, medical expenses, and so on. It is your choice whether you want to claim a standard deduction or you want to claim your itemized deductions. It is advisable to opt for standard deduction in a case where your itemized deductions add up to less than the amount of the standard deduction. Also, make a note that some itemized deductions are subjected to a 2% adjusted gross income (AGI) floor. This means that you need to first subtract the deductions that are not subjected to the floor from your overall taxable income. Then, calculate 2% of the remaining income that is left from the deductions not subjected to the floor. In order to produce your total itemized deductions, you can add whatever is left after subtracting the 2% AGI to the other deductions. If it seems too confusing to calculate the AGI manually, there are various AGI calculators available online that are helpful in doing the math.
Step 3 – Determine your tax liability
In order to determine your tax liability, take the total amount of your income from step 1 and subtract it from the standard deduction amount or the sum of the itemized deductions, which you calculated in step 2. Later, consider the amount that you have received after subtracting step 2 from step 1, and check which tax bracket it falls in. This will help provide your estimated tax liability. The tax rate and liability do not only vary based on the taxable income but also on personal status, that is, whether an individual is single, married jointly, married separately, and head of household. Ensure that you check the IRS annually before calculating your tax liability as federal tax brackets tend to usually change from year-to-year. The federal tax and state tax brackets may differ, and also note that all states do not charge income tax.
Step 4 – Subtract tax credits
The next step is to add the amount of all the credits that you are eligible for. Tax credits are quite valued as they are subtracted from the amount of your tax liability. The tax liability amount that you calculated in step 3 needs to be subtracted with the tax credits. After this, you need to calculate your tax withholding.
Step 5 – Calculation of tax withholding
You are required to submit a pay stub and all the other documents that reflect the amount of tax you have paid till date. You need to multiply the amount as needed in order to cover it for the entire year. This means if your employer had withheld $100 from your last paycheck for taxes, and the paycheck was for the period of a month, your total withholding amount for that one month is ($100 x 1) $100. Hence, your tax withholding amount that you would have paid is approximately ($100 x 12) $1,200 for a period of 12 months.
Step 6 – Calculate the amount of tax refund
The amount of tax withholding that you calculated in step 5 needs to be subtracted from the amount you received in step 4, that is, tax liability after deducting credits. If the resultant amount is a negative number, it means you have overpaid your taxes and can expect a tax refund of the approximate amount.
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