How do you know if you’re going to get a tax refund? There are a few different calculations that go into determining if you’re eligible for a tax refund and how much you’ll receive. Here’s how the IRS calculates your tax refund.
First, how much tax is withheld from your paycheck is determined by the withholding amount you claim on tax form W-4, which you file with your employer. Simplistically, if more tax is withheld than you end up owing, you may receive a refund. If too little tax is withheld, you could owe taxes. But there are some other factors that come into play.
If you’re eligible for tax deductions and tax credits, both can impact your refund amount. Tax deductions can lower your taxable income, while tax credits lower your tax bill directly, and may even apply to your refund, or help you get a refund if you’re not already getting one.
The other income you earned throughout the year also plays a big role. For instance, you may be eligible for a tax refund from your employer-earned wages, but if you also have a side hustle, you may end up either owing taxes, wiping out your refund, or with a smaller refund amount.
That’s because self-employment earners pay both self-employment taxes and income taxes throughout the year, at a higher rate than wage workers pay. If you earn both W-2 income and self-employment income, the amount you pay in self-employment and income tax throughout the year will help determine if you’ll receive a refund.
Other less common tax situations, like claiming income from rental properties, dividends, interest, capital gains or losses, and other scenarios can further complicate whether or not you’ll receive a refund.