Your comprehensive guide to tax refunds
The intricacies of the US tax system can be complicated, even when you’ve lived and worked here your entire life. Luckily, this article is your detailed guide to tax refunds, from how they work to how much you’ll likely receive.
What is a tax refund?
If you’re wondering what a tax refund is and how the refund process works, you’re in the perfect place. A tax refund, also known as a tax rebate (these phrases can be used interchangeably in this context), is a reimbursement made to a taxpayer who’s overpaid their tax in a given tax year.
Tax refunds aren’t uncommon at all. In fact, about 75 percent of taxpayers are reported by the US Treasury each year as “over-withheld.” In other words, about 75 percent of taxpayers have more income withheld from them in tax, usually by their employers, than was necessary for their income. As a result, it’s more common for an American taxpayer to overpay than to underpay.
When the Internal Revenue Service (IRS) calculates that an overpayment has occurred, they’ll rectify this via a tax rebate sent out to you during tax season after records for that financial year have been finalized. Common reasons for a large refund include:
An error on a W-4 form.
An out-of-date W-4 form/other documents that haven’t been updated to reflect a change of circumstances.
A taxpayer intentionally filling out their W-4 form incorrectly so that they will receive a more considerable rebate amount during tax season.
Though some view tax overpayment followed by the receipt of a refund as an interest-free loan from the government, it’s not always the best way to maximize the money you could save elsewhere if you didn’t put it toward tax (unnecessarily). An IRA, 401(k), or interest-yielding savings account might serve you better.
Can I prevent myself from overpaying and needing a tax refund?
You’re more likely to overpay and require a tax refund if you change jobs during the tax year and don’t appropriately adjust your W-4. Similarly, you’ll likely overpay and then receive a refund if you qualify for a refundable tax credit such as:
Earned Income Tax Credit
Premium Tax Credit
Child Tax Credit
If you’d prefer to avoid having to receive a refund and get that tax amount right in the first instance, there are some things you can do. For example, checking and re-checking your W-4 can reduce the likelihood of errors. Similarly, taking the time to estimate your quarterly taxes carefully and accurately will help a lot if you're self-employed.
How much will my tax refund be?
If you’re getting the sense that you’re due a tax refund, you’d probably like to know how much you’ll receive. How much, exactly, will your rebate be? This question is difficult since it depends entirely on your circumstances and the tax year.
That said, there are plenty of surprisingly accurate online tax return and refund calculators to turn to for a ballpark figure. Refund calculators will help you see how your income, deductions, withholdings, and credits impact your tax refund/the remaining balance due. Ensure your chosen calculator is regularly updated to reflect the latest financial information.
How long does it take to get a tax refund?
After you’ve filed and completed your tax return, the IRS estimates that:
Those who completed electronic returns should get refunds within three weeks.
Those who completed paper returns should get refunds within six to eight weeks.
Beyond the time difference associated with paper versus electronic returns, a few more factors can affect how long it takes to get your refund. Your refund could be delayed or slowed if any of the following apply:
Your tax return includes errors or is in some way incomplete.
Your tax return consists of a claim filed for an Earned Income Tax Credit or an Additional Child Tax Credit.
Your tax return includes Form 8379, Injured Spouse Allocation.
Your tax return is somehow affected by identity theft or fraud allegations.
Your tax return needs further review in general.
If there are any issues with your refund, the IRS will contact you by mail to let you know/explain how you can rectify the situation if this applies. In the meantime, if you’re looking for more information about a delay you don’t understand, IRS phone representatives should be able to advise.
How do I track my tax refund?
The quickest way to keep track of your tax refund and its progress into your bank account is to use the IRS website’s refund tool or the IRS2Go mobile app. Systems are updated once every 24 hours, so you’ll always get the latest updates.
If your tax refund hasn’t arrived, it’s past the expected delivery date, and you’ve had no updates, the best way to determine where your rebate is and when it’s coming is to get on the phone with IRS representatives, as above. Before you reach out, ensure you have your Social Security Number (SSN), filing status, and expected total refund amount handy.
What should I do with my tax refund?
If you’ve received a substantial tax refund and don’t have an immediate, pressing bill to pay, you could do many different things to make that money work effectively. First, consider whether you might like to:
Create an emergency fund/bulk up your existing emergency fund.
Place the money in a savings account to gather interest.
Pay off some existing debt.
Add the money to a future college fund.
Invest in stocks and shares.
Make home improvements.
Purchase life insurance.
Set up a Roth IRA with the money and save for your retirement.
There are so many options, and the best one for your needs depends entirely on your financial and personal situation. If you need guidance about how to spend your refund, Unbiased can match you with an advisor who can provide expert advice and guidance to meet your financial goals.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.