The United States Tax Code is a complicated set of laws and regulations, so it’s OK if it all seems confusing and overwhelming to you. However, understanding the tax system and following rules can help taxpayers earn a refund of the taxes that they pay throughout the year to the federal government. Let’s take a look at how taxes are incurred and how you can get the average tax refund (or more.)
What Is Tax Liability?
You might hear this phrase, “Tax Liability” being thrown around a lot in the months leading up to tax season. So, what exactly is tax liability? Tax liability only means the tax that you are required to pay to the local, state or federal government. Simply put, your tax liability is how much you owe the government. How you accrue tax liability is not so simple, however.
You gain tax liability when a “taxable event” occurs. These tax events happen all the time and usually consist of earning income or gaining funds from selling something you own, like land. Your taxable events then get adjusted by your tax rate. This rate changes depending on things like your total earned income or the state you live in for state taxes. Your tax rate comes in the form of a percentage of your taxable events.
For example, if your taxable event is an earned income of $50,000 and your tax rate is 20 percent, your tax liability is $10,000. But it doesn’t stop there. You earn tax deductions and tax credits for a multitude of things like donating to charity, having dependents, spending money on growing a business or a career and so on.
Let’s go back to that example for a moment. Your tax liability is $10,000, but you have a child, so you get a deduction and now your liability is $9,000. You also spent 3,000 this year growing your business by going to a convention to learn and make deals. Your tax liability is now 6,000 dollars. Remember, this is an example and not indicative of any existing tax codes.
Why Do I Need a Refund?
All of those deductions and credits we talked about above don’t get taken into account automatically. Your employer, if you have one, takes out taxes from your paycheck automatically every time you get paid. They look at the tax rate and your earned income and take your tax liability out of your paycheck and give it to the government. Your employer and your government, however, don’t know about all of your deductions. You have to tell them.
So, your employer already takes out the maximum amount based on your tax rate and estimations. When you file your taxes, you are basically saying, “Hey! You took out too much money from my paycheck, I owe less and here’s why.” The government then looks at your claim and, if you filed correctly, says, “Yeah, you’re right. We took too much of your money so we will send you a check to repay you for all of the tax deductions and credits you earned.” That check is your refund.
How Do I Know Which Tax Deductions and Credits I Have Earned?
If you don’t have an intimate knowledge of the tax code, there are many services out there that will help you figure this stuff out. Many tax agents and accountants make their living by helping people with their taxes. These services cost money, however, and are intended for people with many and varied income sources, self-employed and business owners, investors and others with complicated tax needs.
For individuals with a single income or relatively simple tax needs, many free services on the internet can help figure out how to get the maximum tax refund. These calculators take into account all of your credits and deductions and estimate the amount of money that you are owed by the government so you can claim all of those things on your tax return. After calculating, most services will then help you file your returns immediately.
A good example of this free service is the TaxAct calculator. By answering a series of questions and inputting some of your data, the calculator will determine how much you can expect to get back. It’s relatively simple and easy to use. Just remember, this isn’t an official government website. Your actual refund will depend on what the government decides, but usually, it is a sufficiently accurate estimate.
What’s The Average Tax Refund? How Much Can I Expect?
The average tax refund for an American citizen is around $3,000. This is just the national average, though, as you may find that your state has a slightly higher or lower average refund. Texas, for example, has a higher average refund and Maine has the lowest at only $2,300. These averages are for individual (personal) income tax returns and don’t include tax refunds for business income taxes, estate and trust income tax, gift tax and employment tax.
These averages fluctuate from state to state because of the costs of living or the wealth of the state. Also, keep in mind that some states have their own income taxes with their unique tax codes. Oregon, for example, requires residents to pay taxes on their incomes to the state as well as the federal government. Washington does not have a state income tax but instead charges a tax on nearly every good or service purchased in the state.
Do I Get Free Money?
The money you get back from your tax refund is technically already yours. Your employer just gave it to the government and the government refunds it back to you because you have proven that you don’t actually owe that much. Still, though, it feels good to get a big lump sum check in the mail. Just don’t go spending it all in one place. The average American tax refund of $3,000 can do a lot to improve your financial situation if you spend and invest wisely.