US taxes question

[RoseRodent]

I've been meaning to ask this for ages, and since most people do appear to live in the US I figured it was as good a place as any to ask.

I always hear in US shows about people will buy this and that "When they get their taxes back" and I don't quite understand it. In this country taxes are a massive bill to pay, almost nobody gets money back from the tax office unless you work a part-year or become a student or something.

I wondered maybe you pay in a fixed amount each week/month and if you paid too much you get it back at the end of the year, or maybe it's to do with the way you are allowed to deduct certain types of expenses for tax purposes so most people end up with a repayment figure once they factor in things like medical expenses, etc. I'm really not sure. I know taxes are complicated, but could someone give me an easy overview of why almost every US citizen (and it may just be the ones who appear on TV!) seems to be expecting that they will receive money back from taxes each year.

 

[LoveBlue]

I've been meaning to ask this for ages, and since most people do appear to live in the US I figured it was as good a place as any to ask.

I always hear in US shows about people will buy this and that "When they get their taxes back" and I don't quite understand it. In this country taxes are a massive bill to pay, almost nobody gets money back from the tax office unless you work a part-year or become a student or something.

I wondered maybe you pay in a fixed amount each week/month and if you paid too much you get it back at the end of the year, or maybe it's to do with the way you are allowed to deduct certain types of expenses for tax purposes so most people end up with a repayment figure once they factor in things like medical expenses, etc. I'm really not sure. I know taxes are complicated, but could someone give me an easy overview of why almost every US citizen (and it may just be the ones who appear on TV!) seems to be expecting that they will receive money back from taxes each year.

We generally pay our taxes via our paychecks. If we overestimate/pay, then we get some back. If we underestimate/pay, then we pay the difference in April. A lot of people will overestimate/pay as a way of "forced" saving (w/o getting paid interest on what they're saving). Also, deductions play a role in the calculations. I prefer to pay slightly more per paycheck and get a small refund then to have to owe a lump sum.

 

[sequoias]

Wirelessly posted (sent from a smartphone. )

It depends how you want to deduct the taxes from thr paycheck from our jobs. Some want to deduct little and get more from paychecks and some others want to deduct lots and get little from paychecks but get a bigget tax refund. It depends how much you earn too. I prefer to deduct lots and get a refund.

 

[Beowulf]

Wirelessly posted (sent from a smartphone. )

It depends how you want to deduct the taxes from thr paycheck from our jobs. Some want to deduct little and get more from paychecks and some others want to deduct lots and get little from paychecks but get a bigget tax refund. It depends how much you earn too. I prefer to deduct lots and get a refund.

Make sure they are legitimate deductions and you have the receipts to back them up. The IRS do not like deductions and will often challenge them. Save your receipts for several years, just in case.

 

[Reba]

Self-employed people don't have taxes withheld from paychecks, so they have to pay the IRS directly, monthly or quarterly. We pay only what is due, so we don't get refunds. We usually have a big bill to pay at tax time. We pay double because we pay the employer and employee share of the taxes.

RoseRodent, I hope this isn't too confusing.

p.s.

Depending on the state, American workers also pay state income taxes.

 

[StSapphire]

Make sure they are legitimate deductions and you have the receipts to back them up. The IRS do not like deductions and will often challenge them. Save your receipts for several years, just in case.

I think sequoias meant "deduct" as in "take lots out of your paycheck initially" rather than tax deductions when you file.

Rose: To repeat what's already been mentioned - a lot of employers, especially for those who have variable income (ie work hourly) tend to take a bit more than you actually owe out of your paycheck in income taxes, so when people file their taxes, many receive a tax refund.

For anyone who likes this - just realize that by having more withheld from your paycheck, instead of you receiving interest on the money you've earned throughout the year, the government is instead. So while most people prefer not to have a large tax bill at the end of the year, it's financially actually better not to have any payroll taxes withheld and instead deposit whatever portion you would have had withheld into a high-yield savings account so that you're able to earn interest on the money you've earned.

 

[sequoias]

Wirelessly posted (sent from a smartphone. )

It depends how you want to deduct the taxes from thr paycheck from our jobs. Some want to deduct little and get more from paychecks and some others want to deduct lots and get little from paychecks but get a bigget tax refund. It depends how much you earn too. I prefer to deduct lots and get a refund.

Make sure they are legitimate deductions and you have the receipts to back them up. The IRS do not like deductions and will often challenge them. Save your receipts for several years, just in case.

I work for a company, not own business. All the proof is on the w2 forms. You basically have to request changes to the tax deductions before Janurary.

 

[RoseRodent]

Wirelessly posted (sent from a smartphone. )

It depends how you want to deduct the taxes from thr paycheck from our jobs. Some want to deduct little and get more from paychecks and some others want to deduct lots and get little from paychecks but get a bigget tax refund. It depends how much you earn too. I prefer to deduct lots and get a refund.

Wow, so that's a variable rate and you get a choice? In the UK every employee's tax is deducted from paychecks according to a tax code which is given to you by the equivalent of the IRS and in which you have no say. I cannot ask my employer to pay more tax for me so I can have some back later and I cannot ask them to pay less because I know it will not be due.

For example, if your employer has a payroll accident and fails to pay you one week and pays you 2 weeks' wages the next week, you pay slightly under double the tax and you have to wait till April to get it back, you cannot ask them to just not take so much off this time around. You also cannot work a summer job and ask them not to take the whole weekly tax allowance because you know you will not work the rest of the year when you go back to school, they HAVE to take off 0% of the first allowance, 10% of the next allowance, 22% of the next allowance and 40% of the next allowance (and I think there is another one after that but it's for the super-rich) and you sort it out with the taxman later if you don't go over your non-taxable allowance.

Your basic allowance depends on a few things like if you were married before a certain date and were eligible for married couples' allowances, if you are retired, if you receive employee benefits, etc. but over 90% of employed people have the same tax allowance or "Tax Code" and once your employer receives your tax code they have by law to work rigidly to that on a week by week or month my month basis, on assumption you will use 1/12 of your allowance per month or 1/52 of your allowance per week, even if you know you will not use any of next month's tax free allowance. Say your code is 5050, you can earn £97 a week tax free, but if you only earn £85 you will get nothing back. If you earn £200 this week and £85 next week you still have to pay the full rate of tax on your £200 and then you will probably get something back in April, but some tax refunds are so slow people have moved house before they even know they got them, my tenant had been gone 3 years before he got his tax refund! Even though they knew where he lived they sent it to his 2004/5 tax year registered address. :roll:

Almost every time you start a new job you pay "emergency tax" which means you lose 40% of your first paycheck, that's the only one where you normally get it straight back on your next paycheck. In this digital age they still issue you with a piece of paper when you leave one job which you then hand back in to your new employer for them to send back to the tax office that just sent it to you so they can set up your same exact tax code!

 

[sequoias]

Wirelessly posted (sent from a smartphone. )

Wirelessly posted (sent from a smartphone. )

It depends how you want to deduct the taxes from thr paycheck from our jobs. Some want to deduct little and get more from paychecks and some others want to deduct lots and get little from paychecks but get a bigget tax refund. It depends how much you earn too. I prefer to deduct lots and get a refund.

Wow, so that's a variable rate and you get a choice? In the UK every employee's tax is deducted from paychecks according to a tax code which is given to you by the equivalent of the IRS and in which you have no say. I cannot ask my employer to pay more tax for me so I can have some back later and I cannot ask them to pay less because I know it will not be due.

For example, if your employer has a payroll accident and fails to pay you one week and pays you 2 weeks' wages the next week, you pay slightly under double the tax and you have to wait till April to get it back, you cannot ask them to just not take so much off this time around. You also cannot work a summer job and ask them not to take the whole weekly tax allowance because you know you will not work the rest of the year when you go back to school, they HAVE to take off 0% of the first allowance, 10% of the next allowance, 22% of the next allowance and 40% of the next allowance (and I think there is another one after that but it's for the super-rich) and you sort it out with the taxman later if you don't go over your non-taxable allowance.

Your basic allowance depends on a few things like if you were married before a certain date and were eligible for married couples' allowances, if you are retired, if you receive employee benefits, etc. but over 90% of employed people have the same tax allowance or "Tax Code" and once your employer receives your tax code they have by law to work rigidly to that on a week by week or month my month basis, on assumption you will use 1/12 of your allowance per month or 1/52 of your allowance per week, even if you know you will not use any of next month's tax free allowance. Say your code is 5050, you can earn £97 a week tax free, but if you only earn £85 you will get nothing back. If you earn £200 this week and £85 next week you still have to pay the full rate of tax on your £200 and then you will probably get something back in April, but some tax refunds are so slow people have moved house before they even know they got them, my tenant had been gone 3 years before he got his tax refund! Even though they knew where he lived they sent it to his 2004/5 tax year registered address. :roll:

Almost every time you start a new job you pay "emergency tax" which means you lose 40% of your first paycheck, that's the only one where you normally get it straight back on your next paycheck. In this digital age they still issue you with a piece of paper when you leave one job which you then hand back in to your new employer for them to send back to the tax office that just sent it to you so they can set up your same exact tax code!

Very interesting...looks like a big difference in taxing system for sure. This country is capitalism while its socialism in European Union regions. We do have lot of tax loopholes and lot of illwgal immigrants not paying taxes in the US.

 

[Beach girl]

Rose, the way it works here is that everyone automatically gets what they call a "standard deduction." If you are married that deduction is doubled. If you have a dependent child, there is a certain amount of deduction for each child. If you have a disabled adult child who is dependent on you, that also counts for a deduction. If you are disabled yourself, or over 65, another deduction.

You can choose to have more tax or less tax withheld from your paycheck, depending on the number of deductions you claim, but come April, it all comes out even when you file. If you have had too much withheld, you will get the extra money back. If too little, then you will have to pay.

The fly in the ointment is that if you have not had 90% of your tax liability withheld (by December 31, taxes due the following April 15), you could be subject to penalty for underpayment. Therefore some people with irregular income (part-time work, for instance, or commission-based earnings, or dividend-paying stocks that might have a good year or a bad year), prefer to have more taxes taken out from their paycheck than is really due, in order to avoid a surprise of that sort come April 15.

Sometimes working couples where one person makes a lot more than the other find it tricky to estimate what their total tax will be; also sometimes things come up during the year that will have an impact on your tax bill (tax-deductible investment losses, for instance).

The ideal is to have your withholdings come out pretty close to what is actually due, so that you don't get too much back nor do you have to pay a a large amount. But for various reasons, it doesn't always come out that even.

For my husband and me this year as an example, we will be getting some money back from the Federal gov't, as our Fed. taxes were a bit over-paid, but we had to pay the state of Virginia a couple hundred dollars because we were slightly under-paid to the state.

 

[LoveBlue]

Rose, are you thinking of moving to the other side of the pond?

 

[RoseRodent]

Rose, are you thinking of moving to the other side of the pond?

They wouldn't have me, I'm too sick and expensive and could never get insurance, I'm just interested cos so much of my TV over here is based on this cultural phenomenon of "when I get my taxes back" and I couldn't figure out how come everyone always seemed to be owed taxes. Most working people here don't have tax deductible anythings, that's all for people who have stocks and bonds, second properties, offshore accounts, etc.

And we also have a much less forgiving system for most purposes, if you make a lot of money on capital gains you pay taxes. If you lose it all the taxes do not pay you for that, where in certain aspects of US rules it seems you can deduct that from your taxes. If I bought a house, flipped it and made a profit I would be due taxes on that. If I bought a house next tax year, flipped it and made a giant, giant loss I cannot say well I earned my whole tax allowance from my job but I lost more than that on my house so I owe nothing - you pay your income taxes exactly as if you never lost anything. If you make losses as a company or self-employed person that's a different ball game, but as an individual you pretty much suck it up.

If you have medical expenses, for example, you can't claim any of those to offset taxes because you are not "supposed to have" medical expenses because our lovely healtcare system is marvellous and pays for everything hmm but if an employer buys you health insurance they get certain tax breaks on that and so do you, it's allocated a taxable value based on the insurance premium, not on what the expenses are that are covered. This year I will have 3/5 of my income in medical expenses yet I pay income tax as if I had had no expenses. Another reason we Brits so often gripe about inequalities in the healthcare system, if I lived 200 miles further south I'd pay identical taxes but have NO medical expenses.

 

[Beach girl]

If I bought a house next tax year, flipped it and made a giant, giant loss I cannot say well I earned my whole tax allowance from my job but I lost more than that on my house so I owe nothing

Also true in the U.S.; we cannot get any tax deductions on loss of value for a house. In fact some people who have done short-sales and the like (sold a house for less than the mortgage) have ended up having to pay taxes on the amount that was forgiven by the bank, which is a big surprise to many people. (In other words, if you still owe $200,000, say, but do a bank-approved short-sale for $100,000, the additional $100,000 can be treated as income. Whoops! The rules are complicated, so depends how the sale is arranged, but having to pay taxes on this phantom income has really thrown people for a loop when they weren't expecting it.)

We can deduct medical expenses when they are more than 7%, I think it is, of income. It's actually pretty hard to reach that threshold, considering that most people are indeed covered by insurance (despite all the hysteria about universal health insurance which might make you think otherwise).

Rose, have you ever considered moving 200 miles south? That is a huge difference in your medical bills treatment, isn't it? Wow.

 

[rolling7]

Rose, there those of us who want to do away with the IRS. It is just way to complicated for the average person to understand. We would like to have a FLAT TAX, that is where everyone, equally and fairly, pays a tax on purchases. Don't let anyone tell you this is unfair to those making little because those making little will make fewer purchases and less costly ones...those who are "rich" will make more costly purchases and more often, the result is these "rich" pay more tax.

 

[Beach girl]

Rolling, that's more like a Value Added Tax, VAT, rather than a flat tax. Flat tax would mean everyone would pay a certain percentage of their income, no deductions, no adjustments, no nuttin'.

It will never fly here because people cherish those home-owner deductions, etc., that are practically seen as sacred. I agree with you that it would make life a lot simpler and would make decisions like buying a house more straight-forward, instead of depending on tax deductions to cover part of the cost.

 

[posts from hell]

Rose, there those of us who want to do away with the IRS. It is just way to complicated for the average person to understand. We would like to have a FLAT TAX, that is where everyone, equally and fairly, pays a tax on purchases. Don't let anyone tell you this is unfair to those making little because those making little will make fewer purchases and less costly ones...those who are "rich" will make more costly purchases and more often, the result is these "rich" pay more tax.

One could argue that. But the fact is there is no billion-dollar car.

 

[RoseRodent]

Rose, have you ever considered moving 200 miles south? That is a huge difference in your medical bills treatment, isn't it? Wow.

It's complicated by the difference in legal systems, we'd have to hire two of everything (solicitor, surveyor) but the main thing is that all home sales are final in Scotland but purchases and sales are NOT final in England so we could find ourselves legally bound to be out of our house but with nowhere to go, so decided we couldn't do it.

A lot of people have been caught out by taxes on income they didn't ever have here too. Friend of mine is not entitled to student support but they consider him as receiving student support for income purposes so he is not entitled to low income medical expense coverage (optical, dental, etc.) because he doesn't officially have a "low income" and he is taxed on money that he doesn't get and he cannot apply for any other monies because he "gets" this student support. He paid taxes on an an inheritance which was held in trust and the trust invested it and lost more than he paid in taxes to receive the money... nightmare.

 

[Foxrac]

Rose, there those of us who want to do away with the IRS. It is just way to complicated for the average person to understand. We would like to have a FLAT TAX, that is where everyone, equally and fairly, pays a tax on purchases. Don't let anyone tell you this is unfair to those making little because those making little will make fewer purchases and less costly ones...those who are "rich" will make more costly purchases and more often, the result is these "rich" pay more tax.

I don't want flat tax or fair tax at all, however your describe about taxes is actually consumption tax (fair tax, VAT, GST), not flat tax.

 

[Reba]

Rose, there those of us who want to do away with the IRS. It is just way to complicated for the average person to understand. We would like to have a FLAT TAX, that is where everyone, equally and fairly, pays a tax on purchases. Don't let anyone tell you this is unfair to those making little because those making little will make fewer purchases and less costly ones...those who are "rich" will make more costly purchases and more often, the result is these "rich" pay more tax.

Fair Tax, not flat tax.

Americans For Fair Taxation: Americans For Fair Taxation

 

[Glenn]

It would be more accurate to say IF I get a tax refund. It can depend on many variables.

In a way, it is a figure of speech.