Everything You Should Know About Tax Refunds

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Everything You Should Know About Tax Refunds

Pop quiz: What’s the difference between a tax return and a tax refund?

If you’re confused, you’re not alone. But understanding these key terms will help you better tackle your taxes.

A tax return is the form you file annually that outlines your income, expenses, investments and other tax-related information. “It is literally the form you file with the IRS and the state government, if you have a state with income taxes,” says Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block.

You get a tax refund when you pay more taxes to your state government or the federal government – through payroll withholding, for example – than your actual tax liability. In this case, the government will cut you a check for the amount overpaid. The average 2017 tax refund, as of Sept. 1, 2017, was nearly $3,000, according to the Internal Revenue Service. As of that date, about three-quarters of the 145 million returns received had resulted in refund checks issued, according to the IRS.

Confused yet? Here’s what to know about scoring a tax refund.

Who gets a tax refund? Filers who overpaid their taxes during the year can expect to get a tax refund. You’ll need to file your tax return in order to receive the money owed to you by your state or the federal government.

Don’t think of a refund as “free money” – it’s actually already yours. In fact, experts often describe the money in your refund as an interest-free loan to Uncle Sam. That money could be better spent growing in a retirement account, padding your emergency savings or funding another financial goal.

And if you’re getting huge refunds each year, consider tweaking your withholding on your W-4 employment form, making adjustments for life changes, such as new dependents or a change in marital status. Withholding is typically a portion of your wages paid directly to the state or federal government. “Now that interest rates are creeping back up a bit, you don’t want to overpay if you don’t have to,” says Shashin Shah, a certified financial planner and director at SFMG Wealth Advisors in Plano, Texas.

How can I get the largest tax refund? “If there’s one thing you can do to save money, be more organized,” says Juan Montes, enrolled agent with TheTaxProblem.com, a firm with offices in Ceres and San Jose, California. That means tracking receipts, tax documents and forms throughout the year. Those essential papers may include receipts for charitable contributions, student loan interest documentation, property tax forms and other tax documents relevant to your financial life. Whether you’re using a spreadsheet, a digital organizer or an old filing folder, keep tabs on the documents that can score you the largest refund.

Get started on your taxes at the beginning of the year, if possible, so the race against the clock doesn’t cause you to forget or neglect potential tax credits or subsidies. Filing early may also help you reduce the likelihood that a cybercriminal will file a tax return in your name – and collect your refund.

It may be worth visiting a tax preparer if your situation is complex – say you lived and worked in two states during the year or you just bought a home – or if it’s your first time filing taxes. This way, you can feel more confident that you’re claiming the appropriate credits and deductions. To ensure that you’re earning the largest refund possible, find a tax professional who really knows what she’s doing. Visit a certified public account, called a CPA, or an enrolled agent, which is a federally licensed tax practitioner who can represent taxpayers before the IRS. You want to double-check that the professionals you visit have these credentials since not every state requires certification. 

If you suspect that you didn’t get your full tax refund in a previous year, remember that you can amend your tax return within three years of the original file date.

[See: Answers to 7 Burning Tax Questions.]

Where is my tax refund? The IRS states that 90 percent of tax refunds are delivered within 21 days of filing. Tax filers can track the status of their refund, which they can opt to have delivered via an electronic transfer or as a paper check, through the “Where’s My Refund?” tool at IRS.gov or by using the IRS2Go app. If it has been more than 21 days since you filed online, or more than six weeks since you mailed a paper tax return, “Where’s My Refund” directs tax filers to contact the IRS.

Keep in mind that the IRS may hold onto your refund if you have certain outstanding debts, such as child support or student loan bills, Perlman says. Paying those debts on time will ensure that you get your entire refund.

Going digital will also help hurry along your tax refund. You’ll get your refund faster if you use e-file and direct deposit, according to the IRS.

[See: 10 Smart Ways to Spend Your Tax Refund.]

Will I get a tax refund? That depends on your financial situation. Use a tax estimator, such as TurboTax’s TaxCaster, to predict your tax liability. If you have a fairly straightforward tax situation, it should be simple to find out what your tax burden is going to be, Shah says. A tax estimator can help you know whether to prepare your finances for an influx of cash – or whether you’ll owe money on Tax Day.

What should I do with my tax refund? Once you receive it, use your refund wisely. While treating yourself isn’t always a bad idea, if you have more pressing financial obligations, or your emergency fund needs a boost, use some of that money to help reach those financial goals, experts say. Shah encourages clients to pay off credit card balances and manage debt. Consider your financial goals for the coming year, and let your tax refund help you reach them.


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