Tax Refund
A tax refund is a reimbursement to a taxpayer of any excess amount paid to the federal government or a state government. If a taxpayer claims an earned income tax credit or additional child tax credit, the refund will not be issued prior to a specific date, regardless of when the tax return is filed. For 2020 taxes, the IRS is estimating the first week of March for taxpayers claiming these refundable tax credits, if no other issues arise with the tax return and direct deposit is selected as the refund delivery method. If a taxpayer reduces their tax liability to $0 before using the entire portion of the $2,500 tax deduction, the remainder may be taken as a refundable credit up to the lesser of 40% of the remaining credit or $1,000. (Most tax credits are not refundable, which means the tax liability can only be reduced to zero with no refund in excess of taxes paid.)
What Is a Tax Refund?
A tax refund is a reimbursement to a taxpayer of any excess amount paid to the federal government or a state government.
Taxpayers tend to look at a refund as a bonus or a stroke of luck, but it most often represents an interest-free loan that the taxpayer made to the government. In most cases, it is avoidable.
Understanding a Tax Refund
There are a number of reasons a taxpayer may get a refund of more than a trivial amount of money (or owe more than a trivial amount to the government):
The first two examples are easily avoided. That is, the money would have been paid to the taxpayer over the course of the year if the correct information had been on the W-4 form.
Of course, sometimes a tax refund is both unavoidable and welcome. For instance, a taxpayer who was laid off early in the year and was unable to get a new job immediately might receive a substantial refund based on his or her actual annual income.
Refundable Tax Credits
Most tax credits are non-refundable. That is, a taxpayer who owes nothing forfeits the remaining tax credit. But there are exceptions.
Refundable tax credits include:
Both the original $1,200 ($2,400 for couples and $500 per child) stimulus payment, officially known as a "Recovery Rebate," and the newer $600 payment ($1,200 for couples, $600 per child) are classified as advance refundable tax credits on 2020 taxes. This means no matter how much a taxpayer owes (or doesn't owe) in taxes for the 2020 tax year, that taxpayer will get to keep all the money. Additionally, no taxes will be due on the amount received.
How a Tax Refund Works
Tax refunds can be issued in the form of personal checks, U.S. savings bonds, or direct deposits to the taxpayer's bank account, among other options. Most are issued within a few weeks of the date the taxpayer initially files a return. However, there may be some instances where a refund takes longer.
If a taxpayer claims an earned income tax credit or additional child tax credit, the refund will not be issued prior to a specific date, regardless of when the tax return is filed. For 2020 taxes, the IRS is estimating the first week of March for taxpayers claiming these refundable tax credits, if no other issues arise with the tax return and direct deposit is selected as the refund delivery method.
A tax refund is repayment of an interest-free loan to the government, not a happy windfall. It can usually be avoided.
Refunds are always pleasant, but it would be better to avoid overpaying in the first place by claiming properly filling out your W-4 Form or more precisely calculating your estimated taxes. The closer you can get your refund to zero, the more money you will have throughout the prior year.
Not everyone agrees. Some people consider tax refunds an alternative savings plan and look forward to the lump-sum repayment.
Related terms:
Additional Child Tax Credit
The Additional Child Tax Credit was the refundable part of the Child Tax Credit. The refundable credit was revamped under the Tax Cuts and Jobs Act. read more
Amended Return
An amended return is a form filed in order to make corrections to a tax return from a previous year. read more
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is a credit for expenses incurred in the first four years of post-secondary education. read more
Child Tax Credit
This $2,000-per-child credit covers children under 17; $1,400 is refundable. In 2021, it's $3,000 for under 18s ($3,600 under 6) and fully refundable. read more
Earned-Income Credit (EIC)
The earned-income credit (EIC) is a tax credit in the U.S. that benefits certain taxpayers who earn low incomes from work in a particular tax year. read more
Estimated Tax
Estimated tax is a quarterly payment that is required of self-employed people and business owners who do not have taxes automatically withheld. read more
Federal Income Tax
In the U.S., the federal income tax is the tax levied by the IRS on the annual earnings of individuals, corporations, trusts, and other legal entities. read more
Itemized Deduction
Itemizing deductions allows some taxpayers to reduce their taxable income, and thus their taxes, by more than if they used the standard deduction. read more
Non-Refundable Tax Credit
A non-refundable tax credit is a tax credit that can only reduce a taxpayer’s liability to zero. read more
Refundable Credit
A refundable credit is a tax credit that can lower a taxpayer's tax liability regardless of the amount of that liability. read more