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 total amount of taxes paid during the tax year. A tax refund also results from a refundable tax credit that reduces a taxpayer's bill below zero.
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 within 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 by 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 in 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, with 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 extended under the Obama Administration to married couples and families with three or more children.
Some tax refunds occur as a result of refundable tax credits, which results in a refund check if the tax credit applied is higher than the individual’s tax bill. For example, a taxpayer who applies a $3,400 tax credit to his $3,000 tax bill will have his bill reduced to zero, and the remaining portion of the credit, that is $400, refunded to him.
In the United States, tax refunds are calculated on an annual basis. This can be 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.