What is a Refund?
A refund is a payment from the state or federal government taxing authority to reimburse an individual for overpaid taxes.
Businesses and merchants also issue refunds to customers in exchange for the return of purchased goods and when services are unsatisfactory or unfulfilled.
- Regarding taxes, a refund is the money paid back to a taxpayer from the money she overpays to the government through employer withholding.
- The average refund for an American taxpayer in 2018 was $2,899.
- Refunds can also refer to the money a store or business returns to a customer who is unsatisfied.
How a Tax Refund Works
The Internal Revenue Service (IRS) is the most widely known issuer of tax refunds. In Fiscal Year (FY) 2018, the IRS issued more than 120.2 million refunds totaling $394.9 billion. The average tax refund issued was $3,285.
The IRS issues refunds on a regular basis throughout the year. The statistics for 2019 returns showed little change over 2018.
|IRS Statistics on Returns From 2018 to 2019|
|Total Refunds||2018||2019||% Change|
|Amount||$326.333 billion||$320.805 billion||-1.7|
|Direct Deposit Refunds|
|Amount||$273.697 billion||$274.253 billion||0.2|
IRS Refund Schedules
According to the IRS, 90%, or 9 out of every 10 electronically filed tax returns process within 21 days from the e-file acceptance date. Mailed paper returns usually process within 6 to 8 weeks from the date received.
On December 18, 2015, Congress enacted the Protecting Americans from Tax Hikes (PATH) Act. The act requires that the IRS not issue refunds for tax returns which include the Earned Income Credit or Additional Child Tax Credit until February 15. For some taxpayers, this Act extends the time between submitting a return and the processing of their refund.
Using the Where's My Refund tool on the IRS website, a taxpayer may check the status of their refund. Users input their Social Security number or tax identification number (TIN), filing status, and the exact amount of the expected refund to retrieve their status, which is typically updated once per day.
State Income Taxes
State taxing authorities also issue refunds. Most states also have a system that allows taxpayers to verify the status of their refunds.
Seven states (AK, FL, NV, SD, TX, WA, and WY) do not have state income taxes. Residents of these seven states do not need to file state tax returns. However, they are still responsible to file a federal tax return. As of 2018, two states, New Hampshire and Tennessee, do not assess taxes on wage income. Both states tax investment income and dividend income.
Each state regulates the form and amount of business, or corporate, income tax. Some states tax gross receipts and others will tax business income. According to the Tax Foundation, an independent tax policy non-profit, 2017 state business rates are between 2.5 and 12 percent.
Real World Example of Tax Refunds
After the passage of the 2017 Tax Cuts and Jobs Act, the actual amount of taxes the IRS refunds decreased. This is because rule changes reduced the amount of money employers needed to withhold from paychecks. The benefit to workers has been more take-home pay, but the tradeoff is less money in your tax return.
Having a smaller tax return is probably better than having a larger one, however. The money held by the government throughout the year does not earn interest. If taxpayers and employers withheld money for taxes in a high-yield savings account, for example, it could earn as much as 2% interest over the course of the year. For the average tax return of 2018 ($3,285), that's $66 you paid the government to hold onto your money.
Refunds for Goods and Services
Companies may issue refunds to customers based on their return policy. Although rare, some businesses have liberal return policies that allow customers to return purchased goods at any time for a full refund, with or without a receipt.
Typically, e-commerce businesses wait until the returned product is received before they will issue a refund. Companies create return policies that strike a balance between excellent customer service and not compromising the company's profitability. Service providers may allow partial or full refunds for unsatisfactory or unfulfilled services.
Internal Revenue Service. "What to Expect for Refunds This Year." Accessed Feb. 14, 2020.
Internal Revenue Service. "IRS Tax Tip 2001-48 Refunds -- How Long Should They Take?" Accessed Feb. 14, 2020.
Internal Revenue Service. "PATH Act Tax Related Provisions." Accessed Feb. 14, 2020.
Internal Revenue Service. "Refund Status." Accessed Feb. 14, 2020.
Federation of Tax Administrators. "State Individual Income Taxes," Page 1. Accessed Feb. 14, 2020.
Tax Foundation. "State Corporate Income Tax Rates and Brackets for 2019." Accessed Feb. 14, 2020.
Internal Revenue Service. "Filing Season Statistics for Week Ending December 27, 2019." Accessed Feb. 14, 2020.