I get this question every year. Why did my friend, neighbor, co-worker, relative, etc. get a bigger refund than I did? And the honest answer to that question is: I don’t know, I didn’t prepare their taxes. But here are some common reasons why some people might get a bigger refund than you do.
1. They withheld more. That’s the simplest explanation. Technically, you only get back if you overpaid your taxes. So, people who withhold too much, get refunds. If you get less, that actually means you win because you didn’t over withhold. (But trust me, I know. It really doesn’t feel like winning.)
2. They qualified for the earned income tax credit. EItC is one of those tax credits that you can actually receive even if you didn’t pay anything into the system. But—there are many requirements—most notably you have to have earned income. The EIC can make a huge difference in someone’s refund.
3. College tax credits—the American Opportunity Credit can be worth up to $2,500 on someone’s tax return. If your friend was attending school while you stayed home—that could be part of the difference also.
4. Different filing statuses—if you’re single, you could be in a higher tax bracket than your married friend. Or, if you’re married and your wife is also working—then you could be in a higher tax bracket than your single friend. Even though two people have the same job and earn the same amount of money—their circumstances outside of work could have a huge impact on their tax refund.
5. Different deductions—once again, it all has to do with things that happen outside of work. A person renting an apartment could be paying higher taxes than someone paying a mortgage because of the mortgage interest deduction—or any number of other deductions. There are just too many things to name.
6. Income—The more money you make, the more tax you pay. And people who make a lot of money have to pay the alternative minimum tax or AMT.
So, don’t waste your time worrying about your friend’s refund. The important thing is to think about what your goals are. Do you want a big refund? If so, how big of a refund do you want and what would you do with it?
Or would you rather take home more money with each paycheck? If so, what will you do with the extra take home pay?
But whether you choose a larger refund, choose larger take home pay, or maybe choose some middle ground; our job at Roberg Tax Solutions is to help you pay the least amount of tax while making smart decisions for yourself and your family. As long as you’re doing what’s best for you, it really doesn’t matter what your friends are doing anyway now does it?
Are you getting a refund this year? What are you going to do with it? My refund will be paying for some repairs to my house. (I got hit really badly by one of those storms in 2012. Ouch!)
Were you thinking about saving? Or maybe funding your IRA? Or are you like me and you’re spending it on something special? (Okay, I’d rather be saving up to go to Hawaii or something but I’ve got a special savings account set up to pay for my house repairs.)
Here’s my problem—if I get a large refund and it goes straight to my checking account, I will spend it or least a good portion of it, before it makes its way to my savings account. But if the money is in my savings account—it doesn’t come out unless it absolutely has to. (I’m lousy at putting the money in, but once it’s in there, I’m a gatekeeper!) The best thing to keep me and my husband from fighting is to pick where the money should go before we have it in our hands. We can do that with the IRS 8888 form. http://www.irs.gov/pub/irs-pdf/f8888.pdf
The Form 8888 lets you split your refund. You can use the regular 1040 form to have your refund direct deposited to your bank account, but with the 8888 form, you can have part of your refund go to your checking and part of it go to your savings. You can make deposits in up to three different accounts!
This gives you options. You could fund your IRA, your spouse’s IRA and then put some money in your savings too. If you’re really good.
You can even use the split refund to buy US Savings bonds for you, your kids, or your grandchildren. Here’s some more information about that: http://robergtaxsolutions.com/2011/01/tax-time-savings-bonds/
You could (although I confess I’ve never had anyone do this in my office) have your refund split between three bank accounts, buy two savings bonds, and have the IRS issue you a check for whatever’s left over. The point is, you’ve got options.
Here’s some FAQ’s about splitting your refund:
What happens to my split refund if I figured my tax wrong?
If you are getting more money—the amount goes into the first account listed on form 8888.
If you are to get less money, the IRS takes it out of the last account listed in part 1.
Can I use form 8888 if I file an injured spouse return?
What happens if I have an offset for student loans or child support?
Personally, I would skip the 8888 if that‘s a possibility for you. But there’s a whole routing order for how those are handled and it’s in the instructions on the form.
Fraud alert: Do not use the form 8888 to put money into your tax preparer’s bank account. It’s against the law. If you need to pay for your tax preparation with your refund it should be routed through a bank that does that. If you’re not splitting your refund and your preparer hands you a Form 8888—take your paperwork and go someplace else.
So what’s with the sloth? Refunds are going to be late this year. If you’re charging up a storm for Christmas and expecting to pay off your credit cards with your tax refund in January, you may be in for a rough go of it. Here’s what you need to know for this coming tax season:
- The first date that e-file will be open is January 22nd, that’s already a little later than usual. Couple that with the fact that Congress is still messing around with 2012 tax issues and that could hold up the filing season even more.
- The IRS is no longer providing a refund schedule. Instead, they are saying that most people can expect their refund within 21 days if they e-file, and longer if they mail in their return. While there’s a possibility that some refunds will be faster, you can’t count on receiving any faster than 21 days.
- Most refunds are expected to arrive within 21 days, but some refunds can be expected to take 75 days. That’s not a typo, I said seventy-five days.
How will I know if I should expect a 21 day or a 75 day refund? Basically, if you’ve ever had an issue with claiming a dependent, or if you’ve had an identity theft problem, you’re going to fall into the 75 day category. Let’s say your ex claimed your daughter on his return last year and he shouldn’t have. You fought it and won. This year, he tries it again. The IRS snags his return and it’s held up for 75 days. And that’s a good thing, he’s cheating on his taxes and this time it won’t work.
Here’s the down side. You go to file your taxes the right way, but the sneaky ex’s return is already in the system. Now you’re automatically flagged and your return is also getting held for 75 days also. So even though you’re the good person doing the right thing, your tax return can be delayed for up to 75 days because someone else illegally tries to claim your child.
So, be prepared for a late refund and plan accordingly.
Filed under: Divorce, Do It Yourself, Refunds, Review
I’ve said it before: I think Turbo Tax is a great product. I also like 1040.com, the do it yourself software you can get on my website. Good products, good results. But, they’re not perfect—none of them are. And neither are tax preparers, after all they are human and make mistakes as well.
It’s August, generally quiet time in the tax business—but no, not this week. The other day my phone rang nine times—people getting IRS letters. “Hello, I got an IRS letter, what do I do?” I suspect that the IRS must have done a mass mailing the other day for my phone to ring so much. (My phone is usually slow in August.)
Some calls are easy and I can guide someone over the phone, “Oh, just send them a copy of XYZ form, that’s all they want.” Usually though, people need to come in and have me take a look. What I’m often finding this summer—is that people are getting IRS letters saying folks owe money, but when I review their returns, they should be getting a refund instead. And while I think that’s great fun (because I’m a tax geek and that’s the kind of stuff I live for) most people don’t like getting IRS letters saying they owe thousands of dollars at all. (Although they’re usually happy when I show they’ve got a refund coming.)
But here’s the catch—these people wouldn’t know they had money coming back if the IRS didn’t send them the nasty letter in the first place! What about all the people who left money on the table but won’t get an IRS notice?
What I’m finding is that the people with money coming back did their own taxes with Turbo Tax. Not that the Turbo Tax program made a mistake but it is usually just a misunderstanding of what should or should not be listed or possibly a typo. That’s why I’m recommending a three year tax review.
Why three years? If you made a mistake on your tax return, you have three years from the date of filing to file an amendment to get your money back. This is achieved by filing a Form 1040X.
For example, let’s say back on your 2009 tax return, you typed in that you paid $1,000 in mortgage interest when really you paid $10,000. The two numbers look pretty similar but there’s $9,000 worth of deduction there that you just missed out on. If you’re in the 25% tax bracket, that’s a $2,250 refund that you’d be entitled to. Your 2009 tax return was due on April 15, 2010. So, three years from that date is April 15, 2013. If you wanted to get that money back from the IRS, you’d need to file an amended return by then.
You don’t need to do this every year, just bring in three years worth of returns once every three years. Most places charge a fee, but it’s generally much lower than the cost of preparing your returns. (I know one large tax company used to advertise that they’d do it for free.)
If your returns are fine—then you’ve got peace of mind. If you’ve been doing something wrong—well then you’ve learned something. If you get money back—well then you know you did the right thing. It’s a winning situation all the way around.
The First Circuit Court of Appeals ruled that the Defense of Marriage Act (known as DOMA) is unconstitutional. This issue certainly isn’t settled and is going to go to the Supreme Court. The Supreme Court may or may not agree, but one thing I know is that it’s going to take some time. That’s why, if DOMA affects your taxes, you might need to act now.
If you are a gay married couple, you haven’t been allowed to file a joint federal tax return because of DOMA. If DOMA is overturned—then you can. And, if DOMA is overturned—you can go back and amend old tax returns as far as three years. You can amend a tax return from 2009 up until April 15, 2013. After that, any refund you might qualify for is lost.
Here’s the catch—the Supreme Court might not hear the case for at least another year so you’d lose out on some of your refund money just because of timing. But there’s a way to protect your interests now so that if the Supreme Court rules your way, you won’t lose out because of the timeline.
Sorry, but I’m going to get really tax geeky here. If this applies to you, you might want a tax professional’s help. Bottom line—if you would have benefitted tax wise from filing your return as “married filing jointly” then stick with me, it’s important.
You want to file amended tax returns for the tax years you were married with a “protective claim for refund”. Basically, a protective claim for refund means that your right to the refund is contingent on future events. In this case, you won’t have the right to claim your tax refund until the Supreme Court issues a decision on DOMA. For your 2009 tax return, your right to claim that refund could expire before the Supreme Court makes its decision.
Basically, a protective claim is going to preserve your right to claim your refund even if the tax deadline has expired. So if the Supreme Court makes its ruling after April 15, 2013–if you’ve filed a protective claim then you still have a right to your refund even though the statute of limitations for that refund has expired.
When you file your 1040x, you’re going to want to say in the explanation box that you are filing a “Protective claim for refund, contingent upon the US Supreme Court decision on the First Circuit Court of Appeals case regarding the Defense of Marriage Act, Gill v OPM.”
Generally, the IRS won’t do anything on your protective claim until the contingency is resolved—in this case, when the Supreme Court actually makes its ruling.
You will mail your 1040X with the protective claim for refund to the same address that you mail a normal 1040X. It varies depending upon the state you live in, but it will be in the form instructions.
Definitely use certified mail, return receipt requested when you send your amendment in. That’s your back up that you filed.
There aren’t that many people who will qualify to file these protective claims for refund returns. I’m in Missouri, we don’t recognize gay marriage. Illinois, next door just recognized it last year so there wouldn’t be any 2009 tax returns for gay couples. And for some couples, filing jointly doesn’t really reduce their tax burden anyway so it won’t make a difference. But if this could help you, then you need to know about it.
If you’d like to read the full case Gill v OPM, here’s a link: http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=10-2204P.01A
One of the points it specifically references is federal income tax returns.