Tax season is in full swing, which means it’s important to know what kind of tax refund you can expect and how to claim the most advantageous tax credits. But what if you aren’t sure what tax refunds are or how they work? In that case, you’ve come to the right place.
Below, you’ll find a detailed breakdown of tax refunds from individual income tax returns, how they work, and how they may benefit your finances. Let’s get started!
What Are Tax Refunds?
In a nutshell, tax refunds are reimbursements paid to you by the federal and/or state government if you pay more taxes than your “tax liability” (i.e. what you owe based on your marital status, income, and more).
Most people pay taxes automatically. Those taxes are withheld from their paychecks at their places of employment. However, the federal government frequently overestimates tax requirements from its citizens, as do state governments.
Say that you paid $2,000 in taxes over 2021. However, the IRS discovers you only were supposed to pay $1,000. When you file your taxes at that time of year, the IRS will calculate this and reimburse you the remaining amount in the form of a tax refund.
Tax refunds are either direct deposited to your bank account or sent to you via physical check depending on your preferences. Most tax prep software allows you to pick one or the other when filing your return.
What’s the Average Tax Refund?
The average refund is approximately $3536 according to the IRS. That’s up $700 from 2020’s tax year, during which time the average tax refund was a little over $2800. However, keep in mind that your tax refund amount can vary heavily based on your income level, marital status, and what tax credits you choose to claim.
When Do You Get a Tax Refund?
You will get your tax refund anywhere from four weeks to two months after filing your taxes within the required timeframe. In some cases, you may not see a refund until after the deadline when tax season winds down, usually toward the end of April or the beginning of May.
If you think you’re owed a refund and the government hasn’t sent it to you, you can contact the IRS to inquire about your refund status. You can accelerate your tax refund by setting up direct deposit, providing your social security number, and helping the IRS stop fraud through additional identity verification methods.
Generally, unprocessed individual returns result in slow tax refund status. The IRS will issue refunds as quickly as they can, but sometimes it takes until December. The IRS takes so long to clear up any math error(s), catch fraudulent refunds or identity theft, and make sure that they give the correct amount to each person.
Does Everyone Get a Tax Refund?
No. Taxpayers who underpay their taxes throughout the year — such as self-employed individuals or freelancers — instead owe the government extra taxes. They must then pay those extra taxes by a certain date.
More rarely, individuals might pay the government exactly the amount of taxes they owe each year. In these cases, they don’t get a tax refund, nor do they owe the government extra tax payments.
What Are Tax Credits?
Tax credits are special, claimable financial items on your tax return. Put simply, tax credits count against your “taxable income”. Since your owed taxes are based on your taxable income, this has the net benefit of reducing how many taxes you owe each year.
For many Americans, claiming tax credits means that the federal government pays them higher refund amounts. However, many tax credits may only be claimed by certain individuals or Americans with specific circumstances. Let’s take a look at some of the most common and beneficial tax credits you may qualify for.
What Is the Child Tax Credit?
The Child Tax Credit or CTC is a special tax credit updated with the American Rescue Plan (see more below). It was increased from $2000 per child up to $3000 per child for all kids over the age of six. Furthermore, the CTC has been increased from $2000 per child to $3600 per child for all children under the age of six. Parents can now claim the CTC for kids aged 17 instead of 16, as well.
The CTC is a beneficial and advantageous tax credit for working families. Working families can claim the full value of the credit on their taxes if they make $150,000 or less as a couple or $112,500 or less as a single parent/head of household.
As indicated by the name, the Child Tax Credit is a great way to improve one’s tax savings and return. Like all other tax credits, the CTC lowers how much taxable income you report to the IRS. Therefore, you owe fewer taxes over the course of a year and could receive a higher tax return. Additional Child Tax Credit changes may happen in the future.
What Is the American Rescue Plan?
The American Rescue Plan is a directive implemented by Pres. Joe Biden to assist with American economic relief. It includes a variety of measures that directly affect tax returns, including:
- Increases to the above-mentioned Child Tax Credit
- Increases to other tax credits, such as the Earned Income Tax Credit (see more below)
- An extension of unemployment insurance
- Monetary support for small businesses
- Checks up to $1400 per person
- Reduced health insurance premiums
- And more
Because the American Rescue Plan affects so many aspects of American financials, it’s important to know how your taxes may be affected and how your tax return may be higher as a result. Be sure to check out the IRS website and the White House’s guidelines on the American Rescue Plan for more information.
Earned Income Tax Credit Explained
The Earned Income Tax Credit is another valuable tax credit that could see you receive more money from your tax return. Americans may claim the EITC if they are married, single, and whether or not they have children. You just have to earn money from a job to qualify.
The purpose of the Earned Income Tax Credit is to help Americans save money by eliminating federal taxes owed at tax time. For example, if your EITC amount is greater than however much you owe in federal taxes, you’ll get that extra money back in your tax refund.
The EITC’s value is based on your family size, income level, and marital status. For the 2021 tax season, the maximum Earned Income Tax Credit value is $6728.
For example, if you have one child and are a single parent and you earn less than $42,158 a year, you could receive $3618 as part of your EITC. However, if you have three or more children and are married and your combined income with your spouse is less than $57,414, you will qualify for the total EITC value.
Once more, be sure to check out the IRS page on the Earned Income Tax Credit. This page has a helpful breakdown of the tax brackets, income amounts, and qualification rules.
What Is The American Opportunity Tax Credit?
The American Opportunity Tax Credit is intended to help students pay for the first four years of higher education after high school. Students can acquire maximum annual tax credits of $2500 per person. Additionally, 40% or $1000 of the tax credit may be a part of your refund if you don’t owe any taxes.
Eligibility is limited to students:
- Listed on 2021 tax returns
- Pursuing degrees or other educational credentials
- Who have qualified education expenses at eligible institutions
- Who are enrolled at least half the time for an academic period in the 2021 tax year
- And more
The official government site has additional breakdowns for the AOTC and its qualification requirements. Check it out here.
What Will You Do With Your Tax Refund?
Once you receive your tax refund, you can use it however you please. The tax refund can be used for everyday expenses, paying bills, or even paying for new furniture or home remodeling projects you’ve had on your mind.
Whatever you receive, be sure to make sure you aren’t subject to refund fraud by claiming your paper check quickly. Alternatively, contact the IRS through phone lines, official websites, or a mobile app to check your refund status regularly.
Summing It Up
To recap, tax refunds are reimbursements of overpaid taxes sent to you by the federal and/or state governments. Your tax refund could be a few hundred dollars or several thousand dollars. Regardless, many Americans benefit from these refunds each year.
If you’re still not sure how to use your tax refund, why not put it toward some new furniture for your house? Becca’s Home has a great selection of leasable furnishings for any home, so check out our selection today!
Sources:
Here are 3 ways to make the most out of your tax refund | CNBC
Advance Child Tax Credit Payments in 2021 | Internal Revenue Service
American Rescue Plan | The White House
