Getting a refund at the end of tax season is something that most taxpayers look forward to, especially if the refund is sizable. However, financial experts don't think that getting a huge refund is a good thing. Many people are asking the same question—why is my tax return so high in 2022? Here's what a high tax return means.
Receiving a large refund at the end of tax season likely means that too much is being withheld out of your paycheck each month. So, when the refund comes around, you’re really just getting your own money back.
Most Americans look forward to a big tax return.
A survey done by the National Retail Federation showed that in 2021, almost two-thirds or actually 62 percent of taxpayers expected to receive a refund at the end of tax season. The survey also included plans for what taxpayers intended to do with their refunds. 32 percent of taxpayers planned to pay down debt (a slight increase from the previous year of 31 percent), while 54 percent planned to put their money into savings (a jump from 45 percent the previous year).
Sean Stein Smith, a CPA and member of the American Institue of CPAs Financial Literacy Commission, said, “Most people are really happy about the refund because its money going back to them. But any refund you’re getting back is because you had too much tax withheld from your paycheck during the whole year.” The average taxpayer might be able to take home $100 or more in every paycheck if they had the right amount withheld from their income.
Your tax return might be high in 2022 for various reasons.
Out of all taxpayers in the U.S., nearly 77 percent of them withhold too much of their money for taxes each paycheck. Taxpayers pay almost $241 to the IRS based on their W-4. The taxpayer waits over a year to get the same money back in a lump sum tax return. As reported by the IRS, the average tax return issued by the government in 2020 was $2,546 and $2,815 in 2021.
When figuring out your withholding, most people fill out a W-4 form for their employer. The W-4 includes information on dependents, filing status, and income. It also includes whether or not the taxpayer will claim the standard or itemized deduction on their tax return. Withholding the right amount of money for the IRS can be tricky because if you don't withhold enough, you might owe the IRS the next year.
If you withhold too much, then you give the government more money than it needs from you and you get a smaller paycheck. CPA Smith commented that “ideally your refund or additional taxes owed should be zero or as close to zero as possible.”
How can people correct the withholding amount?
While many people might prefer to get a lump sum of their money back at the end of tax season, they could keep that money in their paycheck each month. For people looking to adjust how much money they withhold, they're encouraged to consult the IRS withholding estimator.
For additional information on withholding the right amount, people can consult with a tax adviser to determine the correct amount based on their situation. Tax withholding amounts vary depending on the type of employment.