Tips to Estimate Your Tax Return?

As the tax filing deadline approaches each year, one of the top questions on many taxpayers’ minds is “How much will I get back in my tax refund?” Estimating your tax return can help you plan your finances, budget for the upcoming year, and avoid any surprises come April. 

In this article, we’ll walk through the process of estimating your tax refund and explain why your last paycheck stub is a critical piece of the puzzle.

Why Estimate Your Tax Return?

There are several good reasons to take the time to estimate your tax return:

1. Financial planning: Knowing approximately how much you’ll receive in your tax refund (or how much you may owe) allows you to make informed financial decisions. You can plan how to allocate your refund, such as paying down debt, boosting your emergency fund, or investing for the future.
2. Budgeting: Your tax refund can be a significant windfall. By estimating the amount ahead of time, you can incorporate it into your annual budget and use it wisely.
3. Avoiding surprises: There’s nothing worse than expecting a hefty refund and being shocked to find out you actually owe money to the IRS. Estimating your return reduces the chances of a nasty surprise.
4. Adjusting withholdings: If you find that you’re receiving a very large refund, it may be because you’re having too much tax withheld from your paychecks. Estimating your refund can help you determine if you need to adjust your withholdings on your W-4.

How to Estimate Your Tax Return

Now that we understand the importance of estimating your tax return, let’s dive into the actual process. Here are the key steps:

1. Gather Your Documents

The first step is to gather all the necessary documents that show your income and any deductions or credits you plan to claim. This includes:

• W-2 forms from your employer(s)
• 1099 forms for any freelance, interest, or dividend income
• Records of deductions like mortgage interest, property taxes, charitable donations, and medical expenses
• Receipts for any credits you qualify for, like child care expenses or education costs

2. Determine Your Filing Status

Your filing status has a big impact on your tax return. There are five options:

1. Single
2. Married Filing Jointly
3. Married Filing Separately
4. Head of Household
5. Qualifying Widow(er)

Most taxpayers will use either Single (for unmarried individuals), Married Filing Jointly (for married couples combining their incomes and deductions), or Head of Household (for single parents or some individuals supporting a dependent).

3. Calculate Your Adjusted Gross Income (AGI)

Your AGI is your total income minus any adjustments like student loan interest, alimony payments, or contributions to a traditional IRA. To calculate it, start with your gross income from all sources. This information is on your W-2 form in Box  if you’re an employee. 

If you have freelance income, it will be on your 1099 forms.

Then, subtract any adjustments you qualify for. The resulting number is your AGI. This is the starting point for calculating your taxable income.

4. Subtract Deductions

The next step is to subtract any deductions from your AGI. You can either take the standard deduction or itemize your deductions if you have significant expenses in areas like mortgage interest, medical costs, state and local taxes, or charitable donations.

For the 2023 tax year, the standard deduction is:

• $13,850 for single filers
• $27,700 for married couples filing jointly
• $20,800 for heads of household

If your itemized deductions exceed these amounts, it usually makes sense to itemize. The resulting number after subtracting your deductions is your taxable income.

5. Calculate Your Tax Liability

Once you have your taxable income, you can calculate your tax liability using the IRS tax tables or tax bracket information. For example, if you’re a single filer with a taxable income of $50,000 in 2023, you’d fall into the 22% tax bracket and owe approximately $6,790 in federal income tax before accounting for any credits.

6. Subtract Any Tax Credits

Tax credits directly reduce your tax liability dollar-for-dollar. Some common credits include:

• Earned Income Tax Credit
• Child Tax Credit
• Adoption Credit
• Retirement Savings Contributions Credit
• American Opportunity Tax Credit and Lifetime Learning Credit for education expenses

Subtract any credits you qualify for from your calculated tax liability in Step 5. The result is the actual amount of tax you owe.

7. Compare to Your Withholdings and Estimated Payments

Finally, compare the amount of tax you owe to the total amount withheld from your paychecks throughout the year (found on your W-2 form) plus any estimated tax payments you made. 

If you paid in more than your calculated tax liability, you’ll receive a refund for the difference. If you paid in less, you’ll owe money to the IRS.

The Importance of Your Last Paycheck Stub

One key piece of information you need for estimating your tax return is the total amount withheld from your paychecks for federal income tax throughout the year. While this final number is reported on your W-2 form, you can get a good estimate before receiving your W-2 by looking at your last paycheck stub of the year.

Your final paycheck stub should show your total earnings and withholdings year-to-date. By using a tool like CheckStubMaker Estimate with Last Paycheck Stub, you can get a solid estimate of your tax situation before your official tax forms even arrive. This allows you to start the estimation and planning process earlier.

Check Stub Maker’s paycheck stub generator makes it easy to create a professional pay stub, which breaks down your income, taxes, and deductions for any pay period4. Having this organized information in one place simplifies the process of estimating your tax return.

Other Helpful Tools for Estimating Your Refund

In addition to using your last paycheck stub, there are several other tools that can assist in estimating your tax refund:

1. IRS Withholding Estimator: The IRS provides an online tool that can help you determine if you’re having the right amount of tax withheld from your paychecks.
2. Online tax calculators: Many tax preparation services and financial websites offer free tax return calculators. These typically ask a series of questions about your income and deductions and provide an estimated refund amount.
3. Tax preparation software: If you use a tax software like TurboTax or H&R Block to prepare your return, these programs will usually provide a refund estimate as you input your information.

While these tools can be helpful, remember that they provide estimates only. Your actual refund may differ based on your specific tax situation. For the most accurate calculation, it’s always best to complete your tax return with all finalized numbers.

Conclusion

Estimating your tax return is a smart financial move that allows you to plan, budget, and avoid surprises. By gathering your income documents, understanding your filing status and deductions, and using tools like your last paycheck stub and online calculators, you can gain a solid idea of your expected refund long before the filing deadline.

Remember, while it’s important not to rely too heavily on estimates, having a ballpark idea of your tax situation empowers you to make informed decisions about your money. And by staying organized with tools like Check Stub Maker for creating pay stubs, you’ll be well-prepared once tax season rolls around.