The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
The IRS issues tax refunds when you pay more tax during the year than you actually owe. When you file exempt with your employer for federal tax withholding, you do not make any tax payments during the year. Without paying tax, you do not qualify for a tax refund unless you qualify to claim a refundable tax credit, like the Earned Income Tax Credit.
The tax law requires your employer to withhold federal income tax from each paycheck you receive and send it to the IRS on a quarterly basis. At tax time, your employer provides you with a W-2 Form that reports the total amount of taxes withheld during the year. When you sit down to do your taxes, if your tax liability is less than the total amount withheld, the IRS will send you a tax refund for the difference.
Generally, if you are self-employed and will make more than $1,000, you are required to make income tax payments every three months throughout the year.
Filing exempt from withholding
When you start a job, your employer will ask you to fill out IRS Form W-4. The W-4 estimates your personal allowances so you can tell your employer the amount that should be withheld from each paycheck based on the tax information you provide. To claim an exemption from withholding, you must meet certain criteria. If you had even $1 of tax liability in the prior year or anticipate earning income in excess of the sum of your standard deduction, you cannot be exempt from federal tax withholding in the current year.
For example, if you file as single on your 2017 taxes, you must not anticipate earning income in excess of $10,400 ($12,000 for tax year 2018) if you are single. This is a combination of your standard deduction of $6,350 and your personal exemption of $4,050 for 2017. If you still claimed exempt from withholding and earn income in excess of this amount, you will probably have some tax liability unless you qualify for refundable tax credits like the Earned Income Tax Credit or the Child Tax Credit.
Claiming allowances on the W-4
If you are unable to claim exempt from withholding, you can still reduce the amount that is withheld from each paycheck by claiming allowances on your W-4. The more deductions you anticipate claiming at the end of the year, the more allowances you can take. These allowances are based on your filing status, the itemized deductions you anticipate claiming such as mortgage interest, state property taxes, and medical expenses. TurboTax W-4 withholding calculator can easily help you figure out your withholding allowances.
Refundable tax credits
A refundable tax credit means that even if you have zero tax liability before claiming the credit, you may still get a tax refund. Refundable tax credits not only reduce federal taxes you owe, but they also could result in a tax refund even if the tax credit is more than the tax you owe. For example, the American Opportunity Tax Credit that covers certain higher education expenses is 40 percent refundable and the Earned Income Tax Credit is fully refundable so if you are eligible for these tax credits you may see a tax refund even if you paid no income tax for the year.
Don’t worry about figuring any of this out. TurboTax will ask you simple questions and give you the tax deductions and credits you are eligible for. If you still have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent and get your tax questions answered from the comfort of your couch. A TurboTax Live tax expert can even review, sign, and file your tax return.