So... what exactly is a tax refund and why do some people get more than others?

There are dozens of them scattered around town. You know, at those kiosks at the shopping market. Others are located in shopping centers and strip malls often accompanied by a mascot or costumed person dancing with and waiving signs. We see them really get into marketing gear in January when their pamphlets and brochures begin appearing in your mailbox and email inbox. And they all claim to get you the biggest tax refund possible.

You know who we're talking about - local and national chain tax preparation services. Each and every one vying for your business. Each and every one guaranteeing you your biggest tax refund possible.

While we're not going to review any of these tax prep services or even what they can "promise" you, instead we'd like to cover what a tax return is, why some people get more or less than others, and what you can do to maximize your tax refund.

What a tax refund actually is

In the most basic sense, a tax refund is money given back to you at the end of the fiscal year when you have paid more in your withholding than what you actually owe. In other words, it is the over payment of taxes to the IRS out of each paycheck that is returned to you. Also, it needs to be noted that these also include refundable tax credits you may qualify for.

Why do some people get more in their tax refunds than others do?

Many people have circumstances and situations where they will qualify for a "refundable credit." What this means is that, for instance, somebody qualifies for a $2,000 refundable credit and has no tax liability, they will receive a $2,000 refund. The Earned Income Tax Credit is a refundable credit. The Earned Income Tax Credit is a tax credit that people receive if they earn wages in a lower range that has been established by the IRS. People with children usually qualify for this credit and can receive a refund even if their total tax liability is nonexistent.

A "non-refundable credit" is a tax credit that is applied to your total tax liability making it lower. For instance, if you made $3,000 from your employer and is taxed at 25%, you would owe the IRS $750. However, let's say that you qualified for a $1,000 non-refundable tax credit. This credit would be deducted from your total earnings and you would only be liable to pay taxes on $2,000 of your earnings. Taxed at 25%, you'd owe the IRS $500. That ends up saving you $250. If you have paid $750 in witholdings, you'd receive a $250 check back from the treasury.

Finally, there are "partially refundable tax credits." These types of credits often fit both categories of credits and only a portion of the credit can be refunded. As per the IRS:

The American Opportunity Tax Credit (AOTC) is an example of a partially refundable credit. The maximum credit amount is $2,500 per eligible student, per year. If the credit reduces your tax liability to zero, you can receive up to 40% of the remaining credit amount (up to $1,000) as a tax refund.

Obviously, things like deductions for business expenses, income from other sources, and many other factors will determine exactly what your refund will be. If you have any questions about your refund, a good place to start would be contacting a certified public accountant.

How you can get the biggest refund

If you have overpaid taxes in your withholdings, you will be refunded the difference once your total tax liability has been determined. So, in order to receive the most money back in your tax return, there are multiple things you can do. For instance:

• Do you use your private vehicle for business? If so, your mileage might be able to be deducted from your gross income (before taxes are deducted). This lowers your tax liability.
• Have you made a donation to a 501(c)(3) organization? If so, these contributions might be deductible. Be sure to keep all receipts!
• Do you have a home office? Office supplies, equipment, and inventory can all be deducted as long as everything is exclusively used for work.
• If you are paying alimony, you can write it off. But not child support - that is not deductible.
• Are you funding an IRA for retirement? Keep doing it because what you pay into your IRA lowers your tax liability. How does this work? Because once you start withdrawing from your IRA when you retire, you will then pay taxes of it due to the fact that IRA withdraws are considered "income." There are some other things to consider with an IRA as well such as the fact that some IRA's have a maximum amount that can be applied to your lax liability. Contact your CPA for more information.
• Are you paying off student loans? Every year, your student loan lending institution will send you a form  1098-E that details how much you paid in interest payments while paying off your student loans. These interest payments can be deducted and make your total tax liability lower.

Why it's not a bad thing if you don't get a refund

While it's nice to get a big tax refund at tax time, realize that a tax refund is simply money you overpaid to the IRS during the year and they are just giving it back to you. If you don't get a big refund, or even any at all, that simply means that you have broken even. That's a good thing because instead of overpaying each month, you kept more money in your pockets through out the year.

If you want to know more about tax refunds and what you can do to manage your taxes, call a professional certified public accountant in Idaho Falls. CPA's like Poston, Denney, & Killpack, PLLC has been serving individuals and small businesses throughout east Idaho for years and can help you get the biggest refund possible. Professional tax preparation can help you manage your tax liability and help you keep more money in your pocket, where it belongs.

Poston, Denney, & Killpack, PLLC offers professional small business tax services to include payroll, accounting, audit compliance and assistance, succession planning, new business formation, and non-profit organization tax management. Call us today at (208) 522-0886 or email us at admin@cpapdk.com and we'll get back to you ASAP. We employ licensed and certified tax preparation experts and accountants all dedicated to the success of your small Idaho business.