For example, Jasmine works a salaried position as a digital marketer. Her employer withholds a portion of her paycheck for tax purposes. After Jasmine files her tax return in April, she learns that she has overpaid $1,000 in taxes. Jasmine is reimbursed via a tax refund in the form of a check for $1,000.
How Tax Refunds Work
When an employer pays an employee, they withhold a portion of the employee’s gross salary for income taxes. The amount withheld depends on withholding tables established by the Internal Revenue Service (IRS) and information the employee provides when completing their W-4 (e.g., filing status and tax deductions). After filing a tax return, three possible scenarios can occur: If the taxpayer is entitled to a tax refund, there are various forms the refund can take. Many taxpayers choose direct deposit since it is the fastest way to access a refund, but taxpayers can opt to receive a paper check in the mail. There are other types of tax refunds, as well (more on that later). If you received a tax refund via check and the amount is less than you expected, the IRS will provide a note explaining the reason and further steps, if needed. If it’s confirmed that you should have received more, you may cash the check already received, and you will receive another check for the remaining amount.
Types of Tax Refunds
Beyond the usual direct deposit into a checking account or paper check, taxpayers can also have their tax refunds issued in the following ways:
TreasuryDirect: Deposit your tax refund into a TreasuryDirect account to be used to purchase U.S. Treasury securities. Direct deposit into a retirement account: Deposit all or a portion of the refund into a traditional IRA, Roth IRA, or SEP-IRA. Savings bonds: Use your tax refund to purchase a U.S. Series I Savings Bond up to $5,000. Savings account: Deposit your tax refund into an approved savings account, such as a health savings account (HSA), Archer medical savings account (MSA), or Coverdell education savings account (ESA).
Advantages and Disadvantages of a Tax Refund
Receiving a small lump sum of cash via a tax refund is something many taxpayers look forward to. With proper financial planning, the tax refund can help them replenish their savings or prepare for a large purchase, such as a down payment on a home. For some, having the extra cash on standby is useful for covering unexpected costs, such as an emergency medical procedure. Some critics, however, argue that a tax refund is essentially a repayment after giving an interest-free loan to the government. Instead of overpaying in taxes, consider adjusting your withholdings to align with the taxes you actually owe. The amount that you would have otherwise received via a tax refund could then be invested or stored in a retirement account such as a 401(k).
How To Get Your Federal Tax Refund
Some taxpayers choose to file their own taxes and can download the proper tax filing forms from the IRS. Often, taxpayers use tax preparation software to simplify the tax filing process. Other taxpayers pay an accountant to file their taxes, preferring the convenience and expertise of a professional to do it for them.The Volunteer Income Tax Assistance (VITA) offers tax services, including virtual tax preparation and drop-off services. This program is available to taxpayers with incomes of $58,000 or less, aged 60 years or older, who have a disability, or speak limited English.
