This may come as a surprise to some during tax season, but many high-income earners may not receive sizable tax refunds. Tax refunds usually reflect overpayments relative to actual liability and refundable credits — two things that can shrink as income increases.
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That said, there are a number of reasons not to be envious of the refunds received by high earners. Here are just a few.
Also see how much the average millionaire pays in taxes, according to ChatGPT.
They Adjust Withholding Strategically
“High earners often update their W-4 or quarterly estimates once bonuses, equity comp or business income becomes clearer,” according to Chris Rivera, CPA, a tax expert with The Ecommerce Accountants.
Doing so frequently reduces their risk of overpaying; without overpaying, there’s far less to be refunded.
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They Often Pay Quarterly
People in higher income brackets — business owners, investors and equity-comp earners, for instance — tend to pay quarterly estimated taxes, per Rivera.
Not only that, but they “try to hit safe harbor thresholds rather than massively overpay,” thus negating a need for a large refund down the road.
Large Refunds Often Reflect Miscalculation — Not Smart Planning
“A big refund can feel good psychologically, but financially it usually means someone withheld too much,” Rivera said.
High earners tend not to do so.
They Don’t Qualify for Certain Deductions and Credits
Another reason comes down to credits and deductions that boost refunds.
As seasoned tax advisor Gene Bott, a CPA at Kevin O’Leary’s Tax Hive, made clear to GOBankingRates, “Low-income earners can often receive refunds that exceed what they’ve paid in taxes through credits such as the earned income credit and the child tax credit. High-income earners often lose out on these deductions because they exceed the income limits for these refundable credits.”
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This article originally appeared on GOBankingRates.com: 4 Reasons High Earners Rarely Get Big Tax Refunds
