Question: It is crazy how little I’m getting back on my taxes … why is that?
Answer: Except for people who work — and less than the poverty level (as set by the federal government) — tax refunds are generally1 the result of an overpayment of withholding from your paychecks during the year.
Analogy: Suppose you go to the grocery store, pick out some items, go through the check-out lane, and hand the cashier a $20 note. Your total is not exactly $20. If your purchase total is less than $20, you will get change (a refund) from your overpayment. If your purchase total is more than $20, you will owe more, since the first $20 note is an underpayment.
Ideally, withholding would exactly equal the year-end tax computation, but that is impossible because withholdings are estimates. The ideal real-world result is a small amount of tax due, or a small amount of refund — both indicate that the government didn’t have use of your excess funds for a year and your withholding was adequate and as expected.
If you want a bigger refund, as a way of “forced savings,” then you can increase your withholdings at your employer. The other way to obtain a larger refund is to decrease your tax bill.
There are several ways to reduce your tax bill, actions that are incentivized by the government, such as a tax credit for buying an electric car. If you qualify for one or more of these incentives (known as deductions or credits), your tax bill will be reduced, thereby reducing the amount you owe or increasing your refund.
Continuing the grocery store analogy: Deductions or credits are like grocery store coupons. In themselves, they don’t get you money, but they reduce the amount you owe at checkout.
- Admittedly, this is a simplified statement that would not apply to every possible tax scenario. ↩︎
Kenneth Athon Tax Strategies 