Image courtesy of user TCB on Pixabay.com

Image courtesy of user TCB on Pixabay.com

At a presentation I was giving about taxes a few years ago, I got into a mild argument with an audience member on the subject of having negative taxable income.

The audience member was certain that having enough deductions and exemptions to push your taxable income below $0 resulted in the government “giving you more money.”

I went to the whiteboard and detailed how taxes are calculated, to show that this simply isn’t the case. I think the audience member understood, though I’m not certain.

As I’ve written before, refunds are determined by a combination of tax withholdings and tax credits compared to your tax liability.

Your taxable income cannot drop below $0. If your taxable income is $0, your tax liability is $0.

The tax brackets stop at $0 of taxable income — having taxable income below $0 doesn’t mean your tax liability is a negative number or that the government “pays you more money.”

Example:

Joe has adjusted gross income of $20,000. He has 2 kids and files as head of household. His standard deduction (using 2015 numbers) is $9,250. His exemptions total $12,000 ($4,000 x 3 exemptions, one for Joe and one for each of his kids).

The total of his standard deduction and personal exemptions is $21,250, technically giving him taxable income of a negative $1,250.

On his tax return, Joe will show $0 as his taxable income, and $0 of tax owed.

His refund will depend on how much tax was withheld from his pay during the year, and the credits he qualifies for (likely the earned income credit and the additional child tax credit).

The fact that his taxable income was technically a negative number does not make his tax liability a negative number.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”