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. Intaxification

    The feeling of satisfaction and joy that a tax refund creates ...
  2. Form 843: Claim For Refund And ...

    A tax form distributed by the Internal Revenue Service (IRS) ...
  3. Refund

    A payment from the government for an individual's overpaid taxes. ...
  4. Form 1045: Application For Tentative ...

    A tax form distributed by the Internal Revenue Service (IRS) ...
  5. Notice Of Assessment - NOA

    An annual statement sent by revenue authorities to taxpayers ...
  6. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
Related Articles
  1. Taxes

    5 Ways To Receive Your Tax Refund

    Taxpayers in the U.S. can receive their income tax refund in many different forms - checks, debit cards, savings bonds and direct deposits. Find out which one is right for you.
  2. Taxes

    5 Top Tax Season Questions

    A tax pro answers questions she hears most often and quashes some myths.
  3. Taxes

    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.
  4. Taxes

    How Much Is The Government Making Off You?

    More than 65% of income-tax-paying Americans got a tax refund in 2009. It may have been good for taxpayers, but it was even better for the government.
  5. Taxes

    Key Tax Breaks For Parents

    Parents should take notice of these important tax breaks in 2013.
  6. Taxes

    Tax Withholding: Good For Government, Bad For Taxpayers

    It's important to understand where that money coming out of your paycheck goes and why - after all, you earned it.
  7. Taxes

    6 Tax Myths Everyone Should Know

    There are many tax myths that have grown out of general tax confusion. Learning about them can help you avoid costly mistakes.
  8. Investing Basics

    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.
  9. Taxes

    4 Ways To Give Back With Your Tax Refund

    Many people choose to invest or save their tax refund, but have you considered using the money to improve the lives of others? Find out how to do some good with your tax refund this year.
  10. Taxes

    How Much Tax Do You Really Pay?

    When you add direct and indirect taxes together, your real tax rate is much more than you expected.
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. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center