You know that nice check full of money you’re getting back after filing your taxes? Or the one you have to write to the IRS? Yeah… neither of these should be happening.
In a perfect world the amount taken from your paycheck throughout the year would be the total amount you owe. This is hard to get exact (though the IRS moved to a new system to fix it) but the general idea is if you get money back then you overpaid, and if you write a check you underpaid. Overpaying creates an opportunity cost for the funds (you could have let it gain interest throughout the year) and underpaying can result in fines. This is why it is important to have an accurate W-4 on file with your employer(s) (especially if big life events occur; ex. getting married).
What is withholding?
Because most people would not be able to pay taxes in one lump sum, taxes are withheld (paid) from each paycheck by your employer. If you are a 1099 contractor, sole proprietorship, etc. you’re responsible for doing this yourself on a quarterly basis. How much money gets withheld depends on how much you make and the W-4 you file with your employer.
IRS Free File
If your adjusted gross income for the year was below $66,000 you can use the free file software lookup tool at IRS.gov to find where you can file your federal return for free (with some also offering free state filing).
In most cases this offer is only valid if you click the link through the IRS site.
It is worth nothing that the free version through this tool is almost always superior to the “free” version you would get through the company itself. It is a premium version of the software being offered for free, not just something for simple tax returns.
Understanding Tax Brackets
Many people get confused by this but the U.S. operates on a marginal tax bracket system. This means as you move into higher brackets, you are only paying the higher percentage on the income in that bracket. Moving up does not mean you pay the higher percentage on your entire income for the year.
Consider the following example:
An individual who made $50,000 in 2018 would have the first $9,525 taxed at 10%, $9,525 to $38,700 taxed at 12%, and $38,700 to $50,000 taxed at 22%.