4 reasons why you never get a tax refund
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Most people who file a tax return end up getting a refund from the IRS. But then there are those people who never get a refund. If you're in the latter group, these could be some of the reasons why.
1. You collect higher paychecks upfront
Your employer uses information you provide on your W-4 tax withholding form to determine how much tax to take out of your paycheck each pay period. If you claim more allowances, you'll have less tax withheld. That means your paychecks may be larger, but it also means you may not be due a refund when you file your tax return.
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2. You have a second job whose wages aren't taxed
When you work on a self-employed basis, your employer doesn't withhold tax from your earnings the same way it would happen when you're a salaried employee. If you hold down a side hustle on a self-employed or freelance basis, you may owe taxes on that income when you file your return -- which explains why you don't see a refund coming your way.
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3. You make a lot of money in a brokerage account
Investing in stocks could make you a lot of money. But if you sell investments at a gain, you're liable for taxes on it. If you commonly enjoy gains in your brokerage account, they could result in a scenario where you're not eligible for a tax refund.
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4. You don't claim the right credits or deductions
There are a host of tax breaks available to filers in the form of both deductions and credits. A deduction exempts a portion of your earnings from taxes, and common deductions include mortgage interest, state and local taxes, and medical expenses provided they exceed a high enough portion of your income.
A tax credit, meanwhile, is a dollar-for-dollar reduction of your tax liability. Common credits include the Child Tax Credit and the Earned Income Tax Credit. If you don't claim the credits and deductions you're entitled to, you could lose out on a tax refund, so it's important to know what tax breaks you're eligible for.
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What to do if you never get a tax refund
If you find that you're never entitled to a tax refund, but you also don't tend to owe the IRS a lot of money come tax time, then you may not want to do anything. It's easy to think of a tax refund as a gift from the IRS, but actually it's anything but. When you get a refund, it means you paid more taxes than you had to the year before and are now simply getting your money back.
Your goal, in fact, should be to come as close as possible to breaking even when you file your tax return, so you owe very little to the IRS or only get a small refund. If you never get a refund but typically owe a few hundred dollars to the IRS, that's not a bad situation to land in. It means you weren't denied too much of your earnings during the year, and also aren't facing a colossal tax bill.
On the other hand, if you end up owing the IRS a lot of money every tax season, to the point where you face penalties for having underpaid your taxes during the year, then some changes may be in order. Those could include making estimated quarterly payments if you have a side hustle or large gains in your brokerage account. Or, they could include adjusting your withholding with your employer.
Hiring a tax professional for help could also help you minimize your tax burden, so that's a route worth trying if you're tired of owing large sums of money and you can't figure out a way to avoid that situation on your own.
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