February 26, 2016
The difference between the taxes you owe, your withholdings, and your refund
It's February, and it's at this time that I hear a lot of people talking about refunds on their taxes. Or maybe they owe more. And although I'm not really all that interested in taxes, I can often tell that many people don't know the difference between the taxes that they pay, their withholdings, and their refund.
If you're a neighbor of mine, in the USA, you pay income taxes based on how much money you earn a year. At the beginning of the year, you have an opportunity to fill out a form that calculates what you should owe at the end of the year. Of course, the government doesn't wait until the end of the year to collect, they take a bit out of each paycheck. The money that they withhold from each paycheck is called your withholdings. If, at the end of the year, after all of the calculations are done, that amount turns out to be exactly right, you're done. If too much money was withheld, they give you back the difference. If too little money was withheld, they ask for more.
If you're new to the experience of getting a paycheck, you want to be absolutely sure that there is enough money withheld. If there isn't, not only do you have to pay the rest of the money, there's a penalty. After you've done a year or two of taxes, you should be able to get a good feel for what's about right. Your goal, of course, is to give them only the bare minimum legally required, and keep the rest for yourself, all year.
Where it gets for confusing for a lot of people is that they are looking at that check at the end of year, and nothing else. What they should be looking at is their total income, then the amount on the income tax form that says "total taxes". Whether you withhold a little or a lot during the year doesn't change the percentage of taxes you pay on your income.
This all has nothing to do with being good at math, believe me, I'm not. I've seen people do amazing stuff, like calculating point spreads on football games, or figuring out odds at racetracks. Now that takes some math skill! I guess that understanding how much you pay in taxes really doesn't interest a lot of people, but since it adds up to so much money, I just kind'a wonder why?
Posted by Brad Hall