How Do Tax Returns and Refunds Work?

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Contributor, Benzinga
Updated: February 19, 2020

If you have worked a salaried or part-time job, or operate as an independent contractor in the United States this year, chances are you’re required to file a tax return before April 15th, 2019, aka Tax Day. You also will likely be entitled to a tax refund, which is a return on the amount of money that you’ve overpaid in tax. While the tax code may be virtually impossible for the layperson to fully read and comprehend (it’s actually increased to over 70,000 pages), the truth is thatfiling taxes is a relatively simple and straightforward process for most. If you’ve ever wondered how tax returns and refunds work, how you can file your taxes, and where you can get the forms that you need to file, we’ve created an easy-to-follow guide; and it’s definitely less wordy than the tax code.

What are tax returns? What are tax refunds?

Many consumers confuse and conflate the terms “tax return” and “tax refund.” A tax return is a form, or series of forms, that compose a statement of your income, expenses, liability, and taxes you’ve already paid to the IRS throughout the year. If you are a salaried or hourly employee, you’ve no doubt noticed that your employer withholds a percentage of your pay every period for taxes. When you file your tax return, you send the IRS a statement of how much money you’ve already paid in taxes; for salaried or hourly employees, you will most likely use Form 1040 to file your federal return.On the other hand, a tax refund is the difference between what you actually owed in taxes and what you paid. Most Americans pay more than they truly owe in taxes through their employer. This is because, when an employer withholds pay, the tax money is usually divided between Social Security, Medicare, and also state income tax (if applicable). When you receive a tax refund, the money is the difference between what you owed in federal tax (based on your tax bracket) and what you actually paid in taxes (which is likely much more than the percentage dictated by your bracket). To learn more about income tax and how it is calculated, check out this video:

Why do we even get tax refunds?

The government expects people to spend the entirety of their paychecks as soon as they get them, and if the current data on credit card debt is examined, it’s likely that Americans are actually spending more than they earn each month. The government wants to make sure that it gets its cut of your money before you have a chance to spend it. This is why your employer is required to withhold tax from your paycheck.If you’ve examined one of your pay stubs, you might have noticed that you’re paying a larger percentage of your income in taxes than you should, according to your tax bracket. This is because you also must contribute to other taxes like Social Security and Medicare. However, when the year comes to a close, these other deductions mean that you’ve probably ended up overpaying your taxes when compared to your tax bracket percentages. After you’ve filed your tax return, you’ll receive the money you’ve overpaid as a tax refund. Your tax refund is essentially a 0 percent interest loan that you give to the federal government. This is why the government is heavily incentivized to strongly encourage consumers to overpay on their taxes by imposing harsh penalties and fees on those who underpay.

What determines how much money I’ll get in my tax refund?

Your tax refund entirely depends upon your income, your exemptions, and the amount of money that you’ve already paid in taxes throughout the year. Your refund amount is based on how much your employer took in taxes vs. how much you actually owed due to your tax bracket.For example, let’s say that you are single and you had a taxable income of $40,000 in 2018. According to 2018’s seven tax brackets, you would owe $4,453.50 plus 22% of the amount of money you made over $38,700 in federal taxes. Your total amount owed to the federal government would equal to $4,739.50. Now, let’s say that your employer withheld $8,000 in income, and $5,500 of that tax went to the federal government. Your refund, in this case, would be the total amount that you paid in federal taxes ($5,500) minus the actual amount that you owed for 2018 ($4,739.50). Thus, you could expect a refund check worth $760.50 in the mail after you filed your return.

How can I get my refund?

If you are owed a tax refund, the IRS default is to send you a paper check by mail. The IRS claims to begin processing all e-filed returns within 24 hours of being submitted and all paper returns within 21 calendar days. If you have filed your taxes online or throughtax software, you may also request to receive your refund via direct deposit.It’s possible that you will not be eligible to receive a tax refund. If you have not overpaid in taxes, you can’t expect to be refunded. In some cases, if you have underpaid, you may owe money to the IRS instead of getting a refund. If you’d like to check on the status of your refund, you can do so via the IRS’sofficial website here. Some things that can speed up your refund’s arrival include:

  • Paying early. The sooner you file your tax return, the sooner the IRS can process your data and calculate your return. If you wait until the last minute to file, you can expect a longer delay while waiting for your refund.
  • Double-checking your math and data. If your tax return has an error on it, you will likely be contacted for a correction before your refund is issued. Double-checking the info you’ve submitted can help you get your refund faster.

Some of the things that can delay the arrival of your refund include:

  • Mailing a paper return. Paper tax returns take significantly longer to process. If you’ve mailed a paper return, you can expect to wait up to 21 days after it is received to see your refund approved.
  • Sending your return to the wrong address. The IRS is a massive operation with multiple addresses throughout the country. If you’ve mailed your return to the wrong address, you’ll need to wait through an additional processing period to get your return to the right place. To avoid this hassle, double-check that the address that you’re mailing your return to matches your area’s IRS acceptance address or consider filing electronically.

How can I file my tax return?

Before you can even start thinking about your tax refund, you’ll need to make sure that your return is properly filed on time. You have two options when it comes to filing your return: you may file a paper return or you can use tax prep software to assist you in filing electronically. If you’ve chosen to file with a paper return, visitIRS.gov to locate and download the forms to submit. If you’re going to use software to help you file your return, you’ll first need to choose a tax software manufacturer. No clue where to start? Check out our list of thebest tax software programs available for the 2019 tax season.It’s important to note that your federal taxes cannot be filed at the same time as your state’s income tax (if your state imposes one). If you live in a state that requires you to pay income tax, you cannot pay this directly to the IRS. Instead, you’ll need to locate your state’s tax address and send your return there if you are filing on paper. If you’re still trying to figure outhow to file state taxes, check out our easy-to-follow guide.

Final Thoughts

Do you want to make filing your tax return easier and get more money from your tax refund in one move? Plan ahead. Planning to file your return ahead of times doesn’t just get you your money faster — it also gives you plenty of time to research the deductions and credits that you’re eligible for, which can lower your tax burden and tax bracket. Taking the time to categorize your expenses and contributions to charitable causes throughout the year will make things easier during tax season as well as leave you with more cash in your wallet after your refund check arrives.