Know the Reasons for a Tax Refund
Tax season is upon us, and for many of us, it means one thing- a potential tax refund. A tax refund is the amount of money the government owes you due to overpayment of taxes throughout the year. It is a common misconception that a tax refund is some sort of windfall, but the reality is that it is the government returning your hard-earned money. The IRS reports that the average tax refund as of February 2021 was $2,886. Given the current economic climate, some cash in hand can be a lifesaver for many households.
In this article, we will explore the reasons for a tax refund and how to check the status of your refund. Additionally, we will advise on how to best utilize your refund and why it may be better to adjust your withholdings.
Reasons for a Tax Refund
There are several reasons as to why someone would be owed a tax refund, let’s explore them below.
Overpaid Taxes
The most common reason for a tax refund is that an individual has overpaid their taxes during the year. If more taxes have been taken from your paycheck than are owed, you will receive a refund on the excess amount. This mistake can happen for any number of reasons. For example, when an employee starts a new job, they may not fully understand the IRS withholding system. Or during the year, you may have received a raise that pushed you into a higher tax bracket, resulting in higher tax liability than anticipated. It is essential to review your pay stub regularly to ensure the correct amount of taxes is being taken out.
Tax Credits
Tax credits are another reason that often results in a tax refund. Tax credits reduce the amount of taxes owed, and some are even refundable tax credits – which means they can result in a refund even if there was no tax liability. Refundable tax credits include the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC). These credits are available to taxpayers who meet certain requirements, such as having children and earning below a certain threshold. There are also non-refundable credits that can lower your tax liability, but not result in a refund like the Child Tax Credit.
Overlooked Deductions
Another potential reason for a tax refund is if an individual qualifies for deductions but has overlooked them. Deductions are expenses that lower the total amount of taxable income, resulting in lower tax liability and potentially, a higher refund. Some frequently missed deductions include charitable contributions, state and local taxes, and medical expenses. Ensure that you review all available deductions and record them accurately on your tax return.
Changing Life Events
Major life events such as marriage, divorce, and having children can affect your tax liability. For example, getting married can change your filing status and potentially lower your tax liability. Or having a child can make you eligible for additional tax credits like the Child Tax Credit and the Dependent Care Credit. When experiencing significant life changes, it is essential to seek advice from a tax professional to ensure that you are taking advantage of all eligible tax breaks.
How to Check the Status of Your Refund
If you’ve filed your taxes and are anxiously awaiting your refund, the IRS offers an online portal where you can check the status of your refund. The portal is called “Where’s My Refund?” and can be accessed on the IRS website. To check the status of your refund, you’ll need to provide your social security number, filing status, and the exact amount of your refund. If chosen for review, this process can take longer, so it’s essential to regularly check in on the status of your refund.
How to Best Utilize Your Refund
If you receive a tax refund, it can be tempting to spend the money frivolously. However, a refund presents an excellent opportunity to improve your financial standing. Here are some smart ways to make the most of your refund:
Pay off high-interest debt: If you are carrying high-interest debt, such as credit card debt, allocating your refund towards getting rid of it can significantly improve your financial health. Paying off high-interest debt will save you money on interest payments and improve your credit score.
Build an emergency fund: A robust emergency fund is crucial for financial stability. Allocating a portion of your refund towards your savings account can give you added security should an unexpected expense arise.
Invest in your retirement: Your refund can also be used to invest in your future by putting it in a retirement account. Consider opening or adding to an individual retirement account (IRA) or contributing towards your employer-sponsored 401(k).
Home repairs: Owning a home is a considerable financial commitment, but regular maintenance can be costly. If your home is in need of repairs, allocate some of your refund towards making necessary repairs. Not only will this ensure your property maintains its value, but it may also save you money on repairs in the long run.
Adjusting Your Withholdings
While receiving a tax refund may feel like an exciting bonus, it’s essential to consider adjusting your tax withholdings throughout the year. Adjusting your withholding will result in more money in each paycheck, thereby reducing the amount of overpayment. By adjusting your withholding, you can allocate the extra income towards debt reduction or savings, helping you improve your financial health throughout the year.
To adjust your withholdings, you’ll need to complete a new W-4 form with your employer. The W-4 form is used to confirm how much tax to withhold from your paychecks throughout the year. Adjustments can be made at any time of the year, and the IRS recommends doing so at the beginning of the year or after a major life event, such as getting married.
Conclusion
In conclusion, a tax refund can be a lifesaver for many households, providing some extra cash in hand. Whether you receive a refund due to overpaid taxes, tax credits, or missed deductions, it’s essential to understand why you’ve received it and how to make the most of it. Consider making smart financial decisions by paying off debt, saving for emergencies, or investing in future financial success. Additionally, adjusting your withholdings can result in more income throughout the year, aiding you in meeting your financial goals.
Tax refunds are a commonly utilized method through which American taxpayers reduce the financial burden that they have before the government. The federal tax refund status which the IRS assigns to any given taxpayer can result in that person being given back a small allocation from his or her taxes, frequently in the range of between two and three thousand dollars, though amounts can be higher.
Though many American taxpayers have little to no understanding of how the government determines their federal tax refund status, the tax refund schedule can potentially be utilized more effectively by the relevant applicant if he or she has a better-informed idea of how the IRS comes to these decisions.
The tax refund schedule is determined by the IRS according to three primary criteria: taxes withheld throughout the year, estimated taxes, and refundable tax credits. Taxpayers can determine the validity of their federal tax refund status by adding up the sum of the payments they made for the two two kinds of taxes and the amount to which they are obligated by the third.
If this amount exceeds the taxes which the taxpayer gave to the government over the course of that tax year, then they may be eligible for federal tax refund status. People who are considered a part of the tax system may also be accepted by the IRS for the tax refund schedule before they have actually paid any fees, as can be determined by projections for later withholding of taxes and by the earned income tax credit.
Taxes which are withheld are an important part of the tax refund schedule, referring to the amounts which are regularly withheld from employee paychecks in order to ensure that the taxpayers’ burden for the whole course of the year is met.
Different forms of taxes as are required of taxpayers may be withheld in this way, including income, Social Security, and Medicare taxes. If this amount exceeds the income taxes for which the taxpayer was liable during that year, then she or he will be due the amount by which the withheld taxes exceeded the tax liability.
Estimated taxes represent another factor that is taken into account for determining federal tax refund status. This kind of tax essentially includes all of the ways through which people gain income other than by regular employment, and can also be used to require taxpayers to make up the financial obligations as are not met through withheld taxes.
Refundable tax credits, as will be accepted under the tax refund schedule, can commonly come from the means-tested earned income tax credit. This option can prove the eligibility for receiving tax refunds of a person who has not yet paid taxes. A “means-tested” credit is one provided to people based upon their demonstration of a financial need.
The credit is thus commonly provided as a part of the United States government’s policy of reducing the financial burden imposed by its taxes on those people who are actively engaged in the workplace but not to the point where taxes are easier to meet.
