Welcome back to tax season! It’s an interesting time that can seem extremely fraught to some, and a little exciting to others. For some: so much work to do. For others: big rebates!
I’m fortunate to be young enough that I never needed to know the situation my parents knew: that of a dining room table covered with papers, spending multiple evenings filling in forms manually, calling help lines to get more information, worrying about getting everything right.
I’ve pretty much always used an online service for filling out the forms. I know I’ve heard that professional tax people can somehow magically find ways to get more of my money back, but I have yet to really try. The one time I went to a tax person, I was, shall we say, rather underwhelmed by the experience, and I guess I haven’t moved to try it again.
But with the year end reconciliation starting up, a question worth asking is whether it’s possible to get it exactly right, to pay exactly what you owe such that you get neither a refund or owe anything.
Now versus later
If you’re a wage-earning person, then you usually have taxes taken out with each paycheck. There’s a wage table put out by the IRS (which was recently just updated as part of the new tax law) so that your taxes are taken out in accordance of your tax brackets.
But the problem is that there is a tension between what happens at the time of the wage earning and what happens at the conclusion of the tax year.
At the end of the year, these estimates interact with other life incidents (mortgages, student loan interest, charitable giving, and so on) that can’t be factored in in advance. There’s no way for the IRS to know these things, and in many ways, there’s no way for you to know them either. I know I didn’t expect to buy a home when I did.
The end result is that it is impossible to accurately pay the exact amount in taxes you owe in advance. You can come close, but even that can be a challenge.
Your tax situation
So, knowing that we will all pay somewhat more or less tax than we need to, and knowing that we have the ability to adjust how much money we take out in tax due to exemptions, there are roughly four situations:
- Take as little tax out as possible. This means that you will owe lots of money at the end of the year.
- Take just not enough tax out. You will owe just a small amount of money at the end of the year.
- Take just more than enough tax out. You will receive a very small refund.
- Take as much tax out as possible. You will receive a large refund at the end of the year.
Personally, I find myself in category #3. I’d rather get a little bit back rather than owe anything, but I also feel like getting a huge windfall would be unnecessary and possibly destabilizing.
As much as it would be nice to have a category where everything is automatically taken care of, with our current situation, that is unfortunately not possible. Which category do you typically fit in?