Tax Refund

Business, Legal & Accounting Glossary

Definition: Tax Refund


Tax Refund

Quick Summary of Tax Refund


A tax refund is a payment by the IRS or a state government due to the overpayment of taxes. A tax refund is generally the result of excess withholding from paychecks. However, a tax refund can also result from overpayment of estimated taxes, or the under-estimating of tax credits, deductions, and/or exemptions. When a W-4 form is filed with an employer, the amount of withholding allowances checked will determine the amount of taxes withheld and thus factors into the amount of a tax refund, if applicable. An accurate tax return that warrants a tax refund will result in such tax refund being received within 6 weeks of receipt of filed taxes. If taxes are filed electronically, a tax refund, if warranted, can be expected three weeks after the received date. A tax refund may be received either by direct deposit or via a mailed check. In some instances, a tax refund from the federal government may be considered income and must be reported on state taxes. While a tax refund at the end of the year is welcomed, it does amount to an interest-free loan to the governing body. In addition, consider that income earned in the early months of the year will take a year or more before it is returned by the taxing authority and inflation will have reduced the purchasing power of those excessive tax payments.




Full Definition of Tax Refund


In the United States, taxpayers will get a tax refund, a refund on their U.S. income tax, if the tax they owe is less than the sum of:

  • The total amount of refundable tax credits that they claim.
  • The total amount of withholding that they paid.

According to the Internal Revenue Service, 77% of tax returns filed in 2004 received a refund check, with the average refund check being $2,100. Taxpayers may choose to have their refund directly deposited into their bank account, have a check mailed to them, or have their refund applied to the following year’s income tax. As of 2006, tax filers may now split their tax refund with direct deposit in up to three separate accounts with three different financial institutions. This has given taxpayers an excellent opportunity to save and spend some of their refund (rather than only spend their refund).

Every year, a number of U.S. taxpayers around the country get tax refunds even if they owe zero income tax. This is due to withholding calculations and the earned income tax credit. Because withholding is calculated on an annualized basis, an individual just entering the workforce or unemployed for a long period of time will have more tax than is owed withheld. Refund anticipation loans are a common means to receive a tax refund early, but at the expense of high fees that can reach over 2,000% annual interest. In the 1990s, refunds could take as long as twelve weeks to come back to the taxpayer; however, the average time for a refund is now six weeks, with refunds from electronically filed returns coming in three weeks.

Some people believe that getting a large tax refund is not as desirable as more accurate withholding throughout the year, as a large refund represents a loan paid back by the government interest-free. Optimally, a return should result in a payment owed of just less than would cause a penalty charge, which is 100% of the prior year’s tax (110% for high-income individuals), 90% of the current year’s tax, or $1,000 for individuals who have direct withholding and do not pay estimated tax).

However, some people use the tax refund as a simple “savings plan” where they’re pleasantly surprised to get money back each year (even though it is excess money that they paid earlier in the year). Another argument is that it is better to get a refund rather than to owe money, because in the latter case one might find oneself without sufficient money in the checking account to pay the necessary payment. When properly filled out, the Form W-4 will withhold approximately the correct amount of tax to eliminate a refund or amount owed, assuming the W-4 was filled out at the beginning of the tax year.


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Definition Sources


Definitions for Tax Refund are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 25th April, 2020 | 0 Views.