Tax Refunds
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Basically, a tax refund is a refund on your income tax. It is money sent back to you by the government when you paid too much tax or withheld too much from your salary the previous year. The keywords here are "sent back" – while tax refunds might seem like a surprise gift from heaven, they're actually your money that you willingly gave to the government!
According to Wikipedia, US taxpayers are eligible for a tax refund 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.
Refunds can be (1) directly deposited into the taxpayer's bank account, (2) mailed directly to them as a check, and (3) applied to the following year's income tax.
According to the IRS, the refund checks of taxpayers who filed complete and accurate tax returns will be issued within six weeks from the date the IRS received the return. The process is much quicker when the taxpayer e-filed his/her return: refund checks will be issued within three weeks.
Taxpayers can check on the progress of their tax refunds through the IRS' Where's My Refund web page, which has serviced more than 21 million requests from January 2006 to April 5, 2006. Alternatively, taxpayers can call the IRS Refund Hotline at 1-800-829-1954. For both services, you'll need to provide your social security number, your filing status, and the exact amount of the refund.
As mentioned earlier, tax refunds are actually your money, and it's never wise in the first place to give them to the government and let them keep it for a year, interest-free. You could've done a lot of things – pay off debt, invest in the stock market – if only you had that money all year round in your pocket instead of the US Treasury vaults. This means that getting a huge tax refund now shows that you made an oversight in last year's tax returns.
Experts have one unanimous advice on tax refunds – minimize them. If you get a big tax refund this year, promptly adjust your withholdings so that next year's refund check is small. Claim more withholding allowances so you can reduce your withholdings.
Now, if you're still expecting a big tax refund that you just can't wait to receive, you might be tempted to apply for a tax refund loan. These "refund application loans" allow you to pay a fee and receive thousands of dollars in cash against your coming tax refund. The problem is such loans come at exorbitant interest rates, and you'll be sorry in the end. So be patient in waiting for your tax refund and don't give in to refund loans!
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