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WalletPrep worksheet · Taxes

Is a big tax refund a good thing?

Name ____________________ Date __________

Key ideas

  1. A refund is money you overpaid. In the example, Sam had $8,060 withheld but owed $6,570, so $1,490 of her own pay came back late.
  2. Your W-4 sets how much is withheld. Your employer uses the W-4 you filled out to decide how much federal tax comes out of each paycheck.
  3. Aim for a small refund or bill. Close to zero means your paychecks are right. Owing a little is fine, but owing a lot can bring a penalty.

Vocabulary

Form W-4
The form you give your employer to set how much federal income tax is withheld from each paycheck.
Tax withholding
Income tax your employer takes out of each paycheck and sends to the IRS for you, as a prepayment of your yearly tax.
Adjusted gross income
Your total income for the year minus a short list of adjustments, like deductible IRA contributions and student loan interest. Many tax rules and programs use it.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.

Work it out

Sam is single, earns $70,000 and is paid every two weeks. Her employer withholds $310 of federal income tax from each paycheck. Her actual tax for the year is $6,570.

  1. Withheld per paycheck
  2. Paychecks a year
  3. Withheld for the year
  4. Actual federal income tax
  5. Refund
  6. Refund spread over 26 paychecks

Check yourself

  1. What does a tax refund mean?

    • A. The government gave you a bonus
    • B. You paid more tax during the year than you owed
    • C. You will owe more next year
    • D. Your employer made a payroll error

  2. Your refund was $1,300 and you are paid 26 times a year. About how much more could each paycheck be if your withholding were exact?

    • A. $25
    • B. $50
    • C. $100
    • D. $130

  3. You had a big tax bill this year. What is a good fix for next year?

    • A. Skip filing until you can pay
    • B. Ask for a refund in advance
    • C. Add extra withholding per paycheck on your W-4
    • D. Wait for the IRS to adjust it

Your turn

Open the IRS Tax Withholding Estimator with your latest pay stub and last year's return. If it shows a refund or bill of more than a few hundred dollars, print the new W-4 it fills in and hand it to payroll.

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Answer key

Is a big tax refund a good thing?

Work it out

  1. Withheld per paycheck$310
  2. Paychecks a year26
  3. Withheld for the year$8,060
  4. Actual federal income tax− $6,570
  5. Refund= $1,490
  6. Refund spread over 26 paychecks$57.31
  1. Over the year, $310 × 26 = $8,060 was withheld from Sam's pay.
  2. Her tax is $6,570, so the IRS returns $8,060 − $6,570 = $1,490. That is her own pay, returned months later without interest.
  3. Spread over the year, $1,490 ÷ 26 = $57.31 per paycheck. She runs the IRS estimator and gives payroll a new W-4 to keep most of that each payday.

Check yourself

  1. B. You paid more tax during the year than you owed A refund returns tax you overpaid through withholding. It is your own money coming back.
  2. B. $50 $1,300 ÷ 26 = $50 per paycheck that you could keep during the year instead of waiting for a refund.
  3. C. Add extra withholding per paycheck on your W-4 Step 4(c) of the W-4 adds an extra amount to each paycheck's withholding, which spreads the tax over the year.