The tax season is here again, and one of the crucial aspects of tax preparation is calculating your tax liability for the previous year. In the past, calculating your tax liability was a daunting task that many taxpayers dreaded because it was time-consuming, confusing, and prone to errors. However, with the advent of technology, calculating your tax liability has been simplified through the use of tax return calculators. In this article, we will delve deeper into what a tax return calculator is, how it works, and its benefits to taxpayers.
Understanding Tax Return Calculator
A tax return calculator is an online tool that helps taxpayers estimate their tax liability for a given year. Tax return calculators are designed to facilitate quick and easy tax calculations, reducing the burden and time associated with manual calculations. It is particularly useful for taxpayers who may not have the skills or experience to prepare their tax returns without external help.
Taxpayers can access tax return calculators through a variety of websites, including government and commercial sites. Federal and state tax authorities often provide free tax calculators on their websites to help taxpayers estimate their tax liability and plan their finances accordingly. Commercial websites offer tax return calculators alongside other tax-related services such as tax filing and financial planning.
How Tax Return Calculator Works
Tax return calculators work by collecting some basic information from taxpayers and using this information to estimate their tax liability. The information required may vary from one tax calculator to another, but typically includes:
– Filing status: Taxpayers must indicate whether they are single, married filing jointly, married filing separately, or head of household.
– Income: Taxpayers must provide their gross income, which includes wages, salaries, tips, and other forms of income earned within the tax year.
– Deductions: Taxpayers must indicate whether they plan to take the standard deduction or itemize their deductions.
– Credits: Taxpayers can claim tax credits for specific situations, such as education expenses, child care costs, and retirement contributions.
Once taxpayers have provided the relevant information, the tax return calculator automatically processes the data and provides an estimate of their tax liability. The calculator may also indicate whether the taxpayer is likely to owe taxes or to receive a refund.
Benefits of Tax Return Calculator
There are several benefits of using a tax return calculator. Some of these benefits include:
1. Saves time and avoids errors: Tax return calculators are designed to simplify the tax calculation process, thus reducing the amount of time and effort needed to estimate tax liability. Additionally, tax return calculators are less prone to errors than manual calculations, thereby reducing the likelihood of errors in tax filing.
2. Helps to plan finances: Taxpayers can use tax return calculators to estimate their tax liability and plan their finances accordingly. By knowing the amount of taxes owed or the expected refund, taxpayers can adjust their budgets, plan for future expenses, and make informed financial decisions.
3. Accessible: Tax return calculators are accessible to all taxpayers with an internet connection, meaning that taxpayers can use the calculators from the comfort of their homes without the need to visit a tax preparer’s office.
4. Free or affordable: Tax return calculators are often free or available at an affordable cost, making them accessible to low-income earners who may not afford professional tax preparation services.
5. Accurate: Tax return calculators are designed to provide accurate estimates of tax liability, helping taxpayers avoid penalties and interest charges associated with incorrect filing.
Government Resources on Tax Return Calculator
Both federal and state tax authorities provide free tax return calculators on their websites to help taxpayers estimate their tax liability. The Internal Revenue Service (IRS) provides a free tax calculator, known as the IRS withholding estimator, which helps taxpayers determine the right amount of tax to withhold from their paychecks. Additionally, the IRS provides a tax withholding assistant, which is a comprehensive guide to help employers and employees calculate the correct amount of taxes to withhold.
State tax authorities also provide free tax return calculators on their websites to help residents estimate their state tax liability. For instance, the Franchise Tax Board (FTB) in California provides a tax calculator that helps taxpayers estimate their state income tax liability.
Conclusion
In conclusion, tax return calculators are essential tools that help taxpayers estimate their tax liability and plan their finances accordingly. Tax return calculators are accessible, affordable, and accurate, making them ideal for all taxpayers, including low-income earners and those with limited tax knowledge. Furthermore, federal and state tax authorities provide free tax return calculators on their websites, making them accessible to all taxpayers irrespective of their location. Therefore, to simplify your tax preparation process, consider using a tax return calculator.
There are several tools that you may use to estimate your tax burden or determine withholding allowances you are allowed to take on your W4 form. These tax return calculators help provide guidelines that you can use before speaking with an accountant or financial professional about tax issues. Remember that although these tax return calculators are free and widely available, it should not be used as the sole source of information when dealing with a complicated tax issue.
You will need to ensure that the tax return calculator is accurate and will calculate your tax needs based on the current year. Some tax return calculators are not updates, and that will lead to inaccurate results. Due to the wide availability of free and reasonably accurate tax return calculators, you should be able to use a tax return calculator to estimate your refund without making an obligation to a service. Some of the best tax return calculators are provided by large scale tax preparation firms to demonstrate the extent to which the tax firm can help boost your tax refund or discover exemptions on your behalf.
In addition to determining your tax return, you can also calculate a possible tax refund if there is withholding on your paychecks and your total exemptions and deductions have you sending more than needed to the IRS.
When choosing a tax refund calculator, never enter sensitive personal information, such as social security numbers, bank account information, names or addresses. This information is irrelevant to determining your tax information and will be used to steal your identity instead.
What is a W4 calculator?
If you have income withholding set up on your paychecks, then you are familiar with an IRS W-4 form. On this form, you claim exemptions such as dependents and relevant expenses. A W4 salary tax return calculator can help you determine how much will be withheld from your paycheck and if you can maximize this amount through a better withholding agreement.
To use the W-4 tax return calculator, gather the following information:
– Number of dependents
– Your most recent paycheck
– A listing of income derived from sources other than your job
– Information on any retirement programs you are a part of
– Charitable donations made
– Payments made on a house
– Educational expenses, especially a college education
Let us take John for example:
John is married, 40 years old, filing separately and has two dependents, both 15 years old. Due to their age, this makes childcare expenses a non-factor in the tax return calculator.
This information is added into the W-4 tax return calculator accordingly.
The next step will be to enter information from his paycheck or “paystub.” John is paid every two weeks and claims two withholding allowances on his paycheck, head of household and a dependent. He makes $1,112 in taxable income every paycheck. John has worked for three months, making $6,672 during that time. Due to the withholding arrangement, $800 of that has been withheld for federal income tax. The tax return calculator has an additional space for state income withholding. John has had $500 withheld for state taxes.
These amounts, all of which can be found on John’s paystub are added into the tax return calculator. Since John has no other income, he skips the section where he would enter the sources of other income, including business income, social security benefits and alimony.
John pays about $500 a month in mortgage interest on his house, which he adds to the “house/property” section of the tax return calculator. John also donated $1,000 cash to his favorite charity and will add this into the tax return calculator.
John’s children are not yet in college, but the tax return calculator provides for the tuition paid on an undergraduate institution for a dependent to be entered into it. If John was eligible to take part in a workplace retirement plan, he could enter his contribution, up to 5k, into the plan as well.
After all of this information is entered into the W-4 tax refund calculator, John will see that not only is he entitled to a $1,788 tax refund, he could reduce his withholding by $14, every paycheck, if he were to claim a third withholding allowance. If john has no withholding allowances at all, then $89 would be withheld from all of his paychecks, although his tax refund would be somewhat higher.
Using the W-4 tax return calculator is an important step to take before using an actual tax return calculator as this ensures that you paycheck and withholding allowance is as efficient as possible. Setting up a withholding agreement will often eliminate the need to pay the IRS in April and may even entitle you to a refund on some of that withheld income. If you do not have a withholding agreement, the tax return calculator can give you an estimate of how much you will need to pay the IRS. You should still consult with a professional tax preparation service or tax attorney before filing your tax return, even if you use a tax return calculator.
What is the data that I will need to enter into the tax refund calculator?
Personal information:
Filing Status – there are a few options, of which will entail radically different results, reflecting the obligations of the individual in the household. These filing status options are single, married filing jointly, married filing separately, head of household, qualifying widow(er).
Age – there will be different allowed exemptions, based on age. The calculator will ask you for your age on 12/31 of that tax year
Number of Dependents – enter the number of people that depend on you financially, usually children. This can be a complicated determination, so it is best to check with the IRS before assuming that you can claim a dependent. There are additional distinctions for dependents and they can be qualified with the student, disabled and child residency categories. Each will have special exemptions and other distinctions.
Income
Total (20XX) Wages – here is where you enter the wages from your employment. If you have filled out a W-2 form, it will be the number in Box 1. Some calculators will ask you either immediately after or slightly after this question how much of your wages has been ALREADY withheld for federal tax purposes. You may need to use the W-4 calculator described above to determine the best withholding arrangement.
On your paystub, the FITW (Federal Income Tax Withholding) generally detonated the amount being withheld from this paycheck and withholding to date. The amount withheld from your paycheck will be a major factor in the final determination of your tax refund.
Business income and other income earned – You will need to account for business income, which is generally treated as part of your net income and part of your taxable income. In this section, you will also need to account for income earned on dividends, self-employment, capital gains, social security benefits, and non-taxable combat pay, if applicable. There will be another section to report miscellaneous income that does not fit these categories.
Remember that you have to report all of your income to get the best and most accurate reading from the tax refund calculator.
Expenses
There will be several expenses that can be entered by the tax return calculator will be instrumental in reflecting tax credits for raising children, usually $1,000, which will have a significant impact on your tax return.
With all of this information, the tax refund calculator will determine your taxable income, amount to be taxed, credits that will be applied to your refund and take into account federal income tax withholding.
How do I calculate my taxes using a tax return calculator?
We will go back to John and assume that he does not have withholding on his paychecks and as such, must determine how much he owes the IRS.
Once again, Jon is married, filing separately and 40 years old. This entitles hum of a deduction of $5,800 and exemptions up to $3,700. John earns 36,000 a year and does not have withholding for federal or state income taxes. According to the tax return calculator, this puts his taxable income at $20,500 at a marginal tax rate of 15%. John will owe $3,254 off the bat.
For argument’s sake, let us say that John does have a business but was not successful this year and operated at a $2,000 loss. According to the tax return calculator, this automatically diminishes John’s taxable income to $24,500.
John’s two children that are under the age of 16 net him a $1,000 tax credit per child. John will also enter the $500 he pays on mortgage interest on his house, but according to the tax calculator, this has a negligible impact on the taxes he must pay.
After entering other relevant information about charitable donations and retirement benefits, John finds out, with the aid of the tax return calculator, that he owes the IRS $1,254, which he will need to send in to avoid penalties. Had John allowed withholding, he likely would have been getting a refund instead.
Note
Tax calculators are for information purposes only and only consultation with a tax attorney can give you the most accurate sense of how much of your taxes will be refunded, if any. Not all tax return calculators account for all factors affecting taxation and a tax attorney will help you determine the accuracy of the sum gleaned from the calculator.
