Last updated on September 11th, 2020 at 11:46 am
The COVID-19 pandemic has caused some serious uncertainty… As a dad and a dedicated planner, this causes me some anxiety. I love being in the details of my finances and planning for my financial future. However, because of this pandemic, I have been looking for a way to generate some positive cash flow in my bank account to make sure I can take care of my family. I already received my 2019 tax refund, but I set out to determine if there was a good way to predict the amount of my 2020 tax refund… Turns out there is – let me tell you about it.
Today is March 26, 2020, and I have already calculated what my Federal and state tax refunds will be for the 2020 tax year. That’s right, though I won’t actually file the returns and receive the tax refunds until early 2021, I know what they will be. And, it turns out that my Federal tax refund was going to be over $3,000! Rather than waiting a year to receive that money, I instead took control and reduced my Federal tax withholding by $98 per paycheck. Could you find value in pocketing an extra $98 per paycheck? If you are fortunate enough to still be employed, I urge you to take a look at your tax withholding on your paychecks. Read this post, follow the steps, and reap the rewards. Would you also like to know what your 2020 Federal and state tax refunds will be?
What is a Tax Refund?
The receipt of a tax refund indicates that you overpaid the amount of tax you owed the government. If you are an employee, this tax would have been withheld from your paychecks throughout the year. As a self-employed individual, you would have made estimated tax payments throughout the year since tax is not being withheld from you on a paycheck.
Your income is subject to a tax rate at the Federal level and at the applicable state level. This is the simple part of your tax calculation. Things become more complex when you start layering in various deductions and credits. Here are the four steps I took to calculate my tax year 2020 refund:
- Completed my 2019 tax return.
- Downloaded this 2019 Federal Income Tax Spreadsheet (note that this will automatically download an Excel file to your computer) and populated it by using my 2019 tax return as a guide.
- Downloaded this 2020 Federal Income Tax Spreadsheet (note once again that this will automatically download an Excel file to your computer) and populated it for my estimated 2020 income and expenses.
- Utilized the IRS W-4 Calculator and contacted the payroll department at my work.
2019 Tax Return
Personally, I have used TurboTax for years to prepare my own tax return… but it doesn’t matter how you prepare your returns, what is crucial about this step is getting a PDF or paper copy of the tax returns. In particular, I needed to see Federal Form 1040, Form 1040 Schedules 1 – 3, and Form 1040 Schedules A – C.
Once I completed my 2019 tax return, I gathered the completed tax forms and all documentation (i.e., W-2s, 1099s, 1098s, etc.) that I utilized in the preparation of my 2019 tax returns. I found it easy to gather all of my tax documents since I save these documents electronically.
2019 Federal Income Tax Spreadsheet
This 2019 Federal Income Tax Spreadsheet was built by Glenn Reeves. The spreadsheet performs the same task as TurboTax, H&R Block, a tax accountant, or any other tax service. Glenn provides some pointers on the ‘Instructions’ tab in the file that I utilized to better understand the spreadsheet (you should do this too). As I inputted 2019 tax information in the spreadsheet, the tax due or overpaid was calculated on the ‘1040’ tab.
I could have skipped the 2019 spreadsheet… After all, I had already completed my 2019 tax return anyway. The reason I decided to populate the 2019 spreadsheet was to: 1) make sure that the spreadsheet worked correctly (which it did); and 2) familiarize myself with the spreadsheet in an environment where I already knew the correct answer. Because my 2019 tax return was already finalized, I simply entered information in the 2019 spreadsheet until it matched the 2019 tax forms.
If you are like me, it is likely that your 2020 tax year will be similar to your 2019 tax year. My 2020 income, expenses, and itemized deductions will differ slightly from 2019, but because I had the experience populating the 2019 spreadsheet, I could move forward to populating the 2020 spreadsheet. But before I do that, let’s discuss two important input areas: income and deductions.
Income
The following tabs in the spreadsheets are income-related: ‘W-2s,’ ‘1099-INT,’ ‘1099-DIV,’ ‘1099-G,’ ‘1099-MISC,’ ‘1099-R,’ and ‘SSA-1099.’ As a tax accountant, I felt that I had a good grasp on what was reported on my tax return… However, I ended up gaining a greater understanding of what was actually reported on my W-2. My W-2 showed “Gross Pay” of my salary amount, but then there were some deductions from that gross amount that resulted in “Reported W-2 Wages.” For me, those deductions were dental, medical, and vision insurance premiums that are taken out of my paycheck pretax, and personal Health Savings Account (HSA) contributions to my HSA which also is taken out of my paycheck pretax. This “Reported W-2 Wages” amount was what was reported in Form W-2 box 1.
The ‘W-2s’ tab was very easy to populate when I had my 2019 W-2 in hand. However, when I populated the 2020 spreadsheet I had to calculate what my 2020 “Reported W-2 Wages” would be. Additionally, if you are asking why I didn’t also have a 401K amount deducted from my 2019 W-2 wages, it is because I contributed to a Roth 401K which is an after tax deduction from my paychecks. I am choosing to pay the tax now rather than in retirement when I don’t know how high the tax rate could be.
Lastly, a 1099-INT and a 1099-DIV will typically come from a financial institution (i.e., interest on a savings account or certificate of deposit) or another investment (i.e., stocks and bonds). A 1099-G is where you report any state tax refund that you received. Form 1099-R is where you report any retirement income, including early distributions from a retirement account. And finally, Form SSA-1099 is where you report Social Security income.
Deductions
There are a number of deductions tabs in the spreadsheet that are mostly, if not all, formula driven. In other words, once you make inputs on the income tabs and the ‘1040’ tab, these tabs will calculate automatically because of formulas. The ‘Sch. A’ tab, however, where your itemized deductions are calculated, will require inputs. The Tax Policy Center estimates that, in recent years, only about 30 percent of taxpayers have itemized deductions on their tax returns. U.S. tax reform increased the standard deduction (see table 6 on page 24) to $12,200 for single filers and $24,400 for married filing jointly filers. So, you will only itemize your deductions if they exceed the standard deduction for your filing status.
There are four sections on the Schedule A:
- Medical and Dental Expenses: on line 1 you would enter the medical and dental expenses that you paid out of pocket (i.e., not counting expenses that were paid by your insurance company nor insurance premiums that you paid to your insurance company).
- Taxes You Paid: line 5a (state and local income taxes) will come from the ‘W-2s’ tab, but you would also need to add any applicable amounts on lines 5b and 5c.
- Interest You Paid: this is where you would enter any interest you paid on your mortgage.
- Gifts to Charity: you would enter any charitable contributions here… for example, I pay tithing and fast offerings to The Church of Jesus Christ of Latter-day Saints.
2020 Federal Income Tax Spreadsheet: Step One
Now we will use estimates to populate the 2020 spreadsheet. Because I am a salaried employee, my calculation is a bit easier than that of an hourly or self-employed individual. I began by opening my most recent paycheck and calculating the amount of taxes that would be withheld during 2020. For example, if my paycheck showed that $50 of Federal, Social Security, Medicare, and State taxes were withheld each paycheck, and if I’m paid 26 times per year, then I would report $50 x 26 = $1,300 on lines 2, 4, 6, and 17 of the ‘W-2s’ tab. Some of you may live in a non-income tax state and so line 17 would be $0. The important thing is to estimate the total amount of tax that will be withheld on your paychecks during 2020.
Next, I calculated my wages on line 1 of the ‘W-2s’ tab. Remember, it is the “Reported W-2 Wages” that should be included on this line, not the gross pay. I chose not to estimate an annual raise in the file at this time. Instead, I will update the file as I receive a raise and any bonuses during 2020. If you are confused by this step, take a look at your 2019 W-2, understand how your “Reported W-2 Wages” were calculated, and then do the same thing for 2020.
Finally, I used 2019 as an estimate to update the ‘1099-INT’ and ‘1099-DIV’ tabs… And then I entered the tax refund amount from my 2019 state tax return on the ‘1099-G’ tab.
2020 Federal Income Tax Spreadsheet: Step Two
Upon completion of the income inputs, I entered relevant information on the ‘1040’ tab. For example: 1) I checked the ‘Married filing jointly’ box; 2) I marked the ‘Child Tax Credit’ for my two sons in rows 28-29; and 3) I entered my birth date and my wife’s birth date starting in column AL rows 14 and 16. The income information you already entered will show up on row 32 of this tab. Keep your 2019 tax return and the 2019 spreadsheet close as you prepare the 2020 spreadsheet. The 2019 files will assist you in inputting items to the 2020 spreadsheet.
Lastly, I calculated itemized deductions on the ‘Sch. A’ tab. The state income taxes line was already populated because I had filled out the ‘W-2s’ tab. I plugged in the 2019 property tax amount on my personal residence as an estimate. This amount could go up in 2020, but I don’t think it will increase by much. Next I estimated what my total 2020 charitable contributions would be… And finally, my last step was to calculate the mortgage interest I would pay during 2020. For this, I referenced my mortgage payment schedule… This schedule shows my monthly principal, interest, and escrow. Simply download the file, input your mortgage information, and then sum the amount of 2020 interest. (Just so you are aware, this spreadsheet is accurate… It matches the information reported on my mortgage online account.) I hope you find the schedule beneficial.
Once everything is entered, navigate to the ‘1040’ tab. Line 20 shows a tax refund while line 23 shows tax due. In my case, I have chosen to leave over $300 as my refund amount. I want the cash now, rather than waiting until next year. However, I also left a cushion to avoid a tax due position in early 2021.
IRS W-4 Calculator
Once you have calculated your estimated refund, navigate to the IRS W-4 Calculator. This is a handy new tool that you can utilize to adjust the Federal tax withholding on your paychecks. The calculator will take you through a series of questions and inputs. At the end of the exercise, the calculation should show you right around the same refund amount that you have estimated in the 2020 spreadsheet. At this point, you will choose how much you would like your refund to be.
Once you’ve made your selection, the calculator will generate a pre-populated W-4. I simply emailed this W-4 to my payroll department, and they went ahead and made the change. Funny enough, one of the payroll employees called me just to confirm that I wanted to make this change… Apparently she was surprised by how much my withholding would decrease each paycheck. After giving me the new withholding amount, I quickly plugged this into the ‘W-2s’ tab in the 2020 spreadsheet. I navigated to the ‘1040’ tab, checked my updated refund amount, and assured her that I knew what I was doing and to please move forward with the change. Just like that, an extra $98 per paycheck was heading my way!
What should I do with my Tax Refund?
In a recent survey, participants were asked about their plans for their tax refund. This Offers.com article dated February 10, 2020, reported the following survey results: 1) 21% of respondents intend to put their refunds in savings; 2) 20% will look to pay off debt; 3) 10% will use their tax refund for regular expenses; and 4) 7% plan to invest. Since February 10th, the S&P 500 has dropped from 3,352.09 to 2,475.56, millions of layoffs in the United States have occurred, and uncertainty is running rampant.
These survey results were obviously for the tax year 2019 tax refund that survey respondents were anticipating receiving. I’m sure if the COVID-19 pandemic has changed anything since February 10, 2020, it is that more participants will put their 2019 tax refund in savings. However, what about their tax year 2020 tax refund? Don’t lend your money to the IRS for the next 12 months, interest free. Instead, take the steps outlined in this article to reduce the Federal tax withholding on your paychecks. It doesn’t make sense to me to wait until this time next year to receive a large 2020 tax refund. Strategically reduce your refund amount now by adjusting the tax withholding on your paychecks. The more cash you can accumulate now the better, since 2020 is sure to be unforgettable.