A tax refund is issued by the IRS when more taxes are paid than what was actually owed. However, if you file exempt with your employer for federal tax withholding, you won’t have made any tax payments during the year. If you don’t pay any taxes, then you do not qualify for a tax refund unless you qualify to claim some type of refundable tax credit.

Currently, your employer is required by law to withhold federal income tax from each paycheck and send it to the IRS on a quarterly period. When tax season rolls around, your employer gives you a Form W-2 that reports the total amount of taxes that were withheld throughout the year. Once you’ve paid your taxes, if your tax liability is less than the total amount that was withheld, the IRS will issue you a refund for the difference.

Usually, if you are self-employed and will earn more than $1,000, you are required to make income tax payments every three months during the year. 

Claiming exemptions from withholding

If you’re employed, your employer will have you fill out IRS Form W-4. This form is used to estimate the amount that should be withheld from each paycheck based on the tax information that is provided by you. If you want to claim an exemption from tax withholding, you must meet certain criteria. If you had even one single dollar of tax liability in the year prior or anticipate earning income in excess of the sum of your usual deduction and exemption, you cannot be exempt from federal tax withholding in the current year.

For instance, if you file as single, you must not anticipate earning income above $10,350 in 2016 ($10,300 in 2015). This is the combination of your usual deduction of $6,300 and your personal exemption of $4,050 for 2016. If you still claim an exemption from withholding and earn an income that is above this amount, you will most likely have some tax liability unless you qualify for refundable tax credits such as Earned Income Tax Credit or perhaps the Child Tax Credit.

Claiming allowances on the W-4

If you find yourself unable to claim exempt from withholding, you may still be able to reduce the amount that is withheld from each paycheck by claiming allowances on your W-4. The more deductions you expect to claim at the end of the year, the more allowances that you can take. These allowances are based on your filing status, the number of dependents you claim, plus the itemized deductions you expect to claim. These items can include such things as medical expenses, state property taxes or mortgage interest.

Refundable tax credits

Refundable tax credits are interesting in that even if you have zero tax liability before claiming the credit, you may still be able to get a refund. These not only help reduce the federal taxes that you owe, but they also could result in a tax refund, even if that tax credit turns out to be worth more than the tax that you owe.

If you’d like to learn more about these things and what credits you may be eligible for, contact our offices in Joplin, MO today. We specialize in tax services and tax preparation. A CPA from our firm can help to clarify your questions and help you find a solution.