January 13, 2015 ~ Nicole Odeh
The holidays are over, you spent more than intended (as always), weight loss resolutions have been made (and possibly already broken), and you want your tax refund directly deposited yesterday. So what’s next?
You’ve seen the commercials and you want your magical refund, so you know you need to file – and you will probably just do the same thing you did last year. But what does that really mean? How do you even get a refund?
The IRS is not just giving money away based on your accountant’s awesome skills. There is a true formula and we accountants learn what it is and should be advising you on how to legally minimize your tax liability in a way that makes sense for you, your family, your lifestyle, and your goals.
But, as we all know, the US tax system is confusing . When people say they are “in the 25 percent tax bracket” it really means they pay 0-25 percent on each dollar they earn. It does not mean that if they earn $1 into the 25 percent bracket they will now pay 25 percent on all income. (As an FYI, for 2015, the highest bracket is 39.6 percent.)
So how does this play out for your average Joe? Let’s assume “Joe” has one job, not married, no kids, doesn’t own a home ,and earns $50,000 a year (oh yeah, no 401K, HSA deductions, etc, “Joe” wants to bring home all his cash).
For 2015, the first $6,300 “Joe” earns will not be taxed – this is the “Standard” deduction (depending on your situation, the $6,300 could be higher –if you own a home, give to charity, etc, but $6,300 is the minimum amount that is not taxed).
Add to that a $4,000 exemption, so another $4,000 not taxed.
For “Joe” (remember, not married), the next $9,225 is taxed at 10 percent, so “Joe” pays $923 (the IRS loves to round) on that income.
The next $28,225 is taxed at 15 percent, so another $4,234 in tax.
And the final $2,250 is taxed at 25 percent, so another $563 in tax.
If you are keeping tally, the total tax due would be $0 + $0 + $923 + $4,234 +$563 = $5,719 total tax….
and $5,719 is only 11 percent of a $50,000 salary, far less than 25 percent, which is why this can be confusing!
As long as “Joe” has more than $5,719 withheld for Federal taxes in his paycheck, he should get a refund. Now add in a family, a house, retirement contributions, charity….and that’s when you need to call your accountant.
Part two coming soon…