If you turn on the TV any time between January 1st and April 15th, there’s a good chance you’ll watch a few commercials about tax preparation. Companies like TurboTax, H&R Block, TaxSlayer, and others love to say, “We guarantee your maximum refund!”. But what is a maximum refund? Does using these companies mean running the risk of getting a refund that’s smaller than the maximum?
Let’s take a closer look at what maximum refund guarantees are and why the commercial hype around them might be overrated.
If you earn money working in the United States (or are a United States citizen living abroad), the law requires you to fill out tax forms every year. These forms tell the Internal Revenue Service (IRS) about your earnings and calculate how much you owe in income taxes.
Your employer taxes a part of your paycheck every payday for taxes. The IRS then holds onto those funds until you file your annual return. If the amount already withheld is bigger than your tax bill, you get a refund. If you owe more than your withholdings, you have to pay on tax day.
Here’s an example to help you better understand the math:
Let’s say you get paid twice every month and have $200 withheld from your paycheck for federal income taxes. Over the year, that’s $4,800 in taxes.
When filling out your tax forms, you find that your household owes $4,500 in taxes. Because you’ve already paid $4,800, you get the difference back, or a $300 refund in this case.
Every time you earn money, you increase your annual taxes due. But if you qualify for any deductions or credits, you can lower your taxes due to the IRS. Deductions allow you to pay taxes as if you earned less while credits lower the taxes you owe directly.
Everyone gets an automatic standard deduction. You may qualify for additional deductions if you have paid mortgage interest, charitable donations, or other tax-deductible expenses. Use the IRS website, a tax preparation software, or a tax professional to find which deductions or credits you may qualify for.
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While it may look like fun in the movies, you should not cheat on your taxes. Lying about your income, deductions, or credits can get you fined, penalized, even jail time. Learn more about how to file late taxes and access refunds from years past on the IRS website.
The most essential part of doing your taxes is ensuring they’re accurate and completed on time. If you do those things, you’ll always get your maximum refund. So that commercial jingle you heard is all noise. All tax preparation sources should come with an accurate or maximum refund guarantee.
An accurate refund is your maximum refund. If you follow the prompts in your tax software or are completely open with your professional tax preparer, you should always get a maximum, accurate refund. There’s only one correct number.
That is an IRS guarantee.
A key facet of financial learning is understanding how tax preparation works...
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