Let’s talk about tax refunds.
No, I’m not going to opine on whether getting a tax refund is a good thing or a bad thing (though that’s a good idea for a future blog post).
Instead I want to explain how tax refunds work, and how it’s not always accurate to say you “didn’t owe taxes this year” just because you got a refund.
How the Tax Calculation Works
Time for a mathematical formula. (Try to contain your excitement!)
This is highly simplified but I think it covers the basics well enough. Here’s how the tax calculation works:
Minus certain adjustments to income, such as student loan interest
Minus standard deduction or itemized deductions
Minus personal exemptions
Equals taxable income
Next, you calculate the amount of tax owed on your taxable income.
I know what you’re saying now:
“Wait a minute, ‘tax owed’? That can’t be right. I always get a refund when I file my return!”
Ah, that’s the rub. Just because you got a refund it doesn’t necessarily mean you didn’t owe taxes.
I’ll explain more in Part 2.