Misconception #1: Getting a refund is always a good thing.
Not necessarily. If you receive a refund, it means that the combination of federal taxes withheld on your paychecks, estimated tax payments, and tax credits would have exceeded the final amount of tax you were responsible for paying. Some would argue that a perfect tax return would result in a $0 refund. If you overpay taxes, and the IRS holds your funds, then you are not earning any interest on those funds. Alternatively, you could lower your tax withholding and invest those funds elsewhere.

Misconception #2: Your income is taxed at one flat rate.
This is only true if you are in the 10% tax bracket. Most taxpayers are in a higher bracket. Let’s take an unmarried taxpayer who has $165,000 of taxable income in 2021 as an example. You’ll notice in the chart below that this individual would fall under the 32% tax rate row. This is not the rate that all of his/her income will be taxed at. Of the $165,000 of taxable income, in reality:

  • $9,950 is taxed at 10% 
  • $30,574 is taxed at 12% --- ($40,525 - $9,951)
  • $45,849 is taxed at 22% --- ($86,375 - $40,526) 
  •  $78,549 is taxed at 24% --- ($164,925 - $86,376) 
  • Just $74 is taxed at 32% --- ($165,000 –$164,926)