Each year, almost every person files his or her taxes by mid-April, the IRS deadline. The process is more complicated than it should be and at the end you may owe money or receive a refund. But what does it truly mean to get a tax refund?
What is a Tax Refund?
A tax refund is the amount of money that a taxpayer overpaid in taxes to the government during the previous year. When a taxpayer files their income tax return, they calculate the total amount of taxes owed based on their income, deductions, and other factors. If the amount of taxes paid during the year was more than the amount owed, the taxpayer will receive a tax refund for the difference.
For example, if a taxpayer owed $10,000 in taxes for the year based on their income and deductions, but they had already paid $12,000 in taxes through payroll deductions, estimated tax payments, or other means, they would receive a tax refund of $2,000. This refund represents the excess taxes paid over the amount owed.
Tax refunds can be received in various forms, such as a direct deposit to a bank account, a paper check mailed to the taxpayer, or applied to next year’s taxes. The amount of the refund depends on a variety of factors, including income level, deductions claimed, and tax credits received. A tax refund is not free money, but rather a return of funds that were already paid to the government throughout the year.
To the ill-informed, they look at the tax refund as “free money.” I’ve seen many friends use their tax refunds to buy expensive purses, high end electronics, and concert tickets.
While it may be tempting to spend your tax refund on something fun or indulgent, there are several smart ways to use your tax refund that can help you achieve your financial goals.
Using your tax refund wisely
Here are a few suggestions:
Pay off debt
Use your tax refund to pay down high-interest debt such as credit card balances, personal loans, or car loans. Paying off debt can save you money in the long run by reducing the amount of interest you pay over time.
Build an emergency fund
If you don’t already have an emergency fund, use your tax refund to start one. Aim to save at least three to six months’ worth of living expenses in a separate savings account. Having an emergency fund can provide peace of mind and protect you from financial emergencies.
Save for retirement
Use your tax refund to contribute to an individual retirement account (IRA) or a 401(k) plan if you are eligible. Contributing to a retirement account can help you build wealth and save for the future.
Invest
Consider using your tax refund to invest in stocks, mutual funds, or other investments. Investing can help you grow your money over time and potentially earn a higher return than keeping your money in a savings account.
Home improvements
If you own a home, consider using your tax refund to make improvements that can increase its value or save you money in the long run, such as upgrading appliances, adding insulation, or installing energy-efficient windows.
Overall, it’s important to consider your financial goals and priorities before deciding how to use your tax refund. By using your refund wisely, you can make progress towards your financial goals and set yourself up for long-term financial success.
Tax Season FAQs:
Did you know that you can track your refund?
The IRS (Internal Revenue Service) provides several methods for taxpayers to check the status of their refund, including:
Using the “Where’s My Refund?” tool on the IRS website: Taxpayers can access this tool on the IRS website or by using the IRS2Go mobile app. They will need to provide their Social Security number or Individual Taxpayer Identification Number (ITIN), filing status, and the exact amount of their refund.
Calling the IRS refund hotline: Taxpayers can call the IRS refund hotline at 1-800-829-1954 to check the status of their refund. They will need to provide their Social Security number or ITIN, filing status, and the exact amount of their refund.
Checking with their tax preparer or tax software: Taxpayers can check the status of their refund through their tax preparer or tax software, as many software programs have refund tracking features.
The IRS can take several weeks to process a tax return and issue a refund, so taxpayers should not be alarmed if they do not receive their refund immediately.
Where do you get your tax forms?
Taxpayers can obtain tax forms from several sources:
- The IRS website: You can download these forms directly from the IRS website at www.irs.gov/forms. This is the most convenient and reliable way to obtain forms as they are available online 24/7.
- Local IRS offices: Taxpayers can also visit their local IRS office to pick up tax forms. The IRS has offices located throughout the United States, and taxpayers can find their nearest office by using the IRS office locator tool on the IRS website.
- Post office: During tax season, many post offices provide tax forms to taxpayers free of charge. Taxpayers can check with their local post office to see if they have tax forms available.
- Tax preparation software: Tax preparation software such as TurboTax or H&R Block typically provides forms and schedules relevant to your tax situation.
- Tax preparer: A tax preparer or tax professional can provide tax forms and help you file your taxes.
It’s important to note that not all tax forms and schedules are required for every taxpayer, and some forms may only be available online.
What do you need to file a tax return?
To file a tax return, taxpayers typically need the following information:
- Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN): This is used to identify the taxpayer and ensure that the correct tax return is being filed.
- W-2 forms: These forms show the amount of income earned from an employer, as well as taxes withheld for federal, state, and social security taxes.
- 1099 forms: These forms show income earned from sources other than an employer, such as freelance work, investment income, or rental income.
- Other income records: Taxpayers should gather records of any other income they earned during the tax year, including interest income, unemployment compensation, or Social Security benefits.
- Deduction records: Taxpayers should gather records of any expenses that may be deductible, such as charitable contributions, medical expenses, or business expenses.
- Bank account information: If a taxpayer is due a refund, they will need to provide bank account information to receive their refund via direct deposit.
- Filing status: Taxpayers must determine their filing status, which can be single, married filing jointly, married filing separately, head of household, or qualifying widow(er) with dependent child.
It’s important to note that the specific requirements for filing a tax return can vary depending on individual circumstances, such as whether the taxpayer is a dependent or a nonresident alien. Taxpayers may want to consult with a tax professional or use tax preparation software to ensure they are meeting all of the requirements for their specific tax situation.
