Filing an income tax return can grant you a tax refund, but not all taxpayers get refund checks. According to The Huffington Post, about 75 percent of taxpayers get refund checks every year, which means a quarter of taxpayers don't get tax refunds. Several factors related to your personal tax situation such as your tax withholding, deductions and income sources can potentially result in underpayment of income taxes.
Low Tax Withholding
Traditional employees who earn wages or salaries pay income tax through tax withholding. Tax withholding occurs when your employer takes a cut of your paycheck and sends it to the government to cover your income tax liability. When you first take a job, you fill out a tax form called a W-4 that sets up your tax withholding. If you claim allowances on your W-4, your employer reduces your tax withholding. Claiming too many allowances can reduce your withholding to a point where you won't get a tax refund and may even owe more taxes.
Lack of Tax Breaks
The Internal Revenue Service offers tax breaks in the form of exemptions and deductions that reduce taxable income and credits that directly reduce your total tax bill. Tax breaks are available on a wide range of expenses, from caring for children to charitable donations and higher education expenses. If you become ineligible for tax breaks that you claimed in the past, it could increase your income tax liability to a point where you don't get a refund. For instance, if your child moves out on his own so you can no longer claim him as a dependent, you could see a substantial tax increase.
Tax withholding only accounts for income taxes related to income earned from an employer. If you have sources of taxable unearned income, it could increase your income tax liability to a level where you don't get a tax refund. Examples of taxable unearned income include interest earned on savings accounts and other interest-bearing accounts, dividend payments, Social Security and alimony.
Self-employed workers are not subject to income tax withholding. Instead, self-employed workers are required to send estimated tax payments to the government on a quarterly basis to pay income taxes and taxes related to Social Security and Medicare. If you have self-employment income and you fail to pay enough estimated tax, you won't get a tax refund and you might even face a tax penalty for underpayment.
- Internal Revenue Service: Tax Withholding
- Internal Revenue Service: Estimated Taxes
- Internal Revenue Service: In 2012, Many Tax Benefits Increase Due to Inflation Adjustments
- Internal Revenue Service: Six Facts about Choosing the Standard or Itemized Deductions
- Internal Revenue Service: Tax Topics - Itemized Deductions
- TheHuffingtonPost.com: A Tax Refund Isn't Always Something To Feel Guilty About
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.