Tax Refund

DEFINITION of 'Tax Refund'

A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount paid.

BREAKING DOWN 'Tax Refund'

Tax refunds are a return of excess amounts of income tax that a taxpayer has paid to the state or federal government throughout the past year. In the United States, most people receive income tax refunds during the year. These refunds can be issued in the form of personal checks, U.S. savings bonds or direct deposits to the taxpayer's bank account.  Most refunds are issued within a few weeks of the date the taxpayer initially filed their annual income tax. For immediate questions about an individual income tax refund, visit the IRS website.

Taxpayers tend to look on tax refunds as a "bonus" or a stroke of luck at tax time. In reality, a tax refund represents an interest-free loan that a taxpayer makes to the government.  Refunds are always pleasant, but the payment of the refunded sum could have been avoided in the first place by filling out one's initial income tax forms so that as all of one's deductions (which is, essentially, the credit for which the federal government is offering refunds) were properly accounted for. The best way to manage this is to attempt to reduce your withheld federal taxes, instead filing them manually with the rest of your income taxes. However, depending on the character of the employer, this is not always possible for the individual taxpayer. Alternatively, some embrace the idea of a temporary, interest-free loan to the federal government as a means to be forced to save some money.

Many people in the United States receive tax refunds even if they haven't paid federal income tax. This occurs as a result of the federal Earned Income Tax Credit (EITC), which is a major refundable tax credit issued to low-income households, particularly those with children. Established the 1975, the EITC is the most prominent of a number of tax credits designed to benefit low-income households or households with children. However, it is one of the only ones that operates as a refundable tax credit, most tax credits acting as direct deductions from the initial amount filed. The specific measures of the EITC have fluctuated over the years. In the aftermath of the 2007-2008 "Great Recession," the EITC was temporarily expanded under the Obama Administration for married couples and families with three or more children.

In the United States, tax refunds are calculated on an annual basis. This can operate at a disadvantage to taxpayers just entering the workplace or individuals who are unemployed for extended periods of time. Until the annual tax refunds are filed, the government will withhold much more income than that for which these people will actually be liable.

 

 

RELATED TERMS
  1. Refund

    A payment from the government for an individual's overpaid taxes. ...
  2. Tax Refund Anticipation Loan - ...

    A loan provided by a third party against a taxpayer's expected ...
  3. Tax Credit

    An amount of money that a taxpayer is able to subtract from the ...
  4. Intaxification

    The feeling of satisfaction and joy that a tax refund creates ...
  5. Refundable Credit

    A tax credit that is not limited by the amount of an individual's ...
  6. Form 843: Claim For Refund And ...

    A tax form distributed by the Internal Revenue Service (IRS) ...
Related Articles
  1. Personal Finance

    IRS Refund Lost? Here's What to Do

    Don't panic. There are a number of reasons your refund might be delayed – and solutions for each.
  2. Personal Finance

    The First Thing You Should Do With Your Tax Refund

    Nobody likes to pay taxes, but everyone loves to get a tax refund. When the check arrives in the mail, it's hard to resist spending it on some indulgence.
  3. Personal Finance

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  4. Personal Finance

    12 Reasons Your IRS Refund Was Late

    A tax refund can be a nice post-tax reward, but if it's taking too long to arrive, here are the most likely reasons for the hold-up and how to check on it.
  5. Financial Advisor

    The Best Uses for a Tax Refund

    Time to splurge or squirrel away? The best thing you (or your client) can do with a tax refund.
  6. Personal Finance

    5 Smart Uses For Your Tax Refund

    Consider using the bulk of your refund to take care of long-term needs, like saving for retirement or college.
  7. Personal Finance

    This Explains $0 Federal Income Tax for Millions

    Understand how the earned income tax credit works and whether it applies to you.
  8. Personal Finance

    Missed the Tax Return Deadline? Here's What to Do

    Most important: Do it now.
  9. Personal Finance

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  10. Markets

    3 Ways to Invest Your Tax Refund

    Investing your tax refund is a smart way to reach your financial goals. But depending on what you want to achieve, investment styles may differ.
RELATED FAQS
  1. Can the IRS withhold your tax refund?

    Learn about the instances in which the IRS can levy your federal and state income tax refunds, and find out how the levy ... Read Answer >>
  2. How do I get a split tax refund?

    You don't have to receive your tax refund in a lump sum. Learn the options you have for splitting the money the IRS owes ... Read Answer >>
  3. Why did a mandated IRA withdrawal take away my 2015 tax refund?

    I completed my taxes and was due a sizable refund, until I remembered to add an IRA distribution from an IRA bequeathed to ... Read Answer >>
  4. When should my tax refund arrive?

    Read about how long it takes the IRS to process your income tax return and what factors could delay receiving your tax refund. Read Answer >>
  5. What are the benefits of splitting my tax refund?

    If you receive a refund when you file your tax return, there are some convenient options you can take advantage of. Read Answer >>
  6. Can the IRS garnish your tax refund?

    Understand whether the IRS can legally garnish a person's tax returns. Learn the priority for garnishing wages for state ... Read Answer >>
Trading Center