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You may be surprised to learn that tax refunds and tax returns are two different things. Yes, people often get confused between the two.
Here is everything you need to know about tax refunds.
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A tax refund is the reimbursement of excess taxes paid by the taxpayer to the state and the federal governments.
A tax return is a form that specifies your income in detail, your investments, deductions, expenses, and additional related information.
Sometimes when a taxpayer pays more tax on his income than required, the state government refunds the extra amount.
You will not always receive a refund. To know your tax liability and if you are eligible for a tax refund, you can use a tax estimator.
The circumstances in which you can get a tax refund include:
If you don’t have sufficient money in your account to pay your taxes in full for the year, the tax credit is an easy way out. Tax credits allow taxpayers to pay their taxes in installments or dollar by dollar.
You can also get a refund on your tax credit. Here are certain types of refundable tax credits.
As per the child tax credit, a taxpayer parent with low income having a child younger than 17 years old is eligible to receive $2,000 per child, of which $1,400 is refundable.
This credit applies to low- to moderate-income groups that are either self-employed or work as an employee. Their earned income and gross income should be below a certain level to be eligible for EITC. It also depends upon the number of family members.
For the year 2020, EITC stands at $6,600 if you have three or more children.
This tax credit is partially refundable and is applicable for taxpayers and even nontaxpayers to support their higher education expenses.
You can get a credit of up to $2,500 a year under the American opportunity tax credit. This credit was recently extended to all those with zero tax liability as well. However, you can only receive this tax credit for a maximum period of four years per student.
There is also a lifetime learning credit extended to individuals below the annual income of $68,000. Whit this tax credit, $2,000 is provided for higher education expenses with no maximum claim period.
The first step in the tax refund process is filing your tax return. A tax return form helps calculate your tax liability and allows you to ask for a tax refund (if any).
Once you have filled and submitted your tax return successfully, the government assesses your tax return through all the information presented in your tax return form.
Once it has assessed your tax return, the government first sends an affirmation for a refund before sending the refund money.
Refund processing may take time, depending on the medium you used to file your tax refund. When tax returns are filed electronically, the refunds are processed and sent out within 21 days of the IRS receiving your tax return. However, they may take up to 12 weeks to finally reflect in your bank account.
On the other hand, if the tax return is filed through paper, it takes at least six to eight weeks to show up.
These are just estimates provided by the IRS and shouldn’t be relied on. It may sometimes take even more time to get your tax refunds.
If the taxpayer has filed a tax credit claim, it may take even longer irrespective of when the tax return is filed.
How do you know if you will get a tax refund? It depends on your financial situation. You can predict your tax liability using a tax estimator.
Moreover, knowing if you will receive a tax refund beforehand is beneficial if you are dependent on it to make future payments.
There are mainly four ways to claim a tax refund, or preferably four places you can receive your tax refund:
You can claim your tax refunds up to three years after filing them. If you receive a tax refund much greater than your expected amount, wait a few days before you decide to spend it all. Sometimes, the IRS makes mistakes and may send more money than required that will be debited later.
At times, the IRS can even send over a lower refund amount than you are eligible for. This way, the government will end up owing you money.
Should you avoid overpaying taxes in the first place to prevent refunds? Should you file your return even if your income doesn’t fall within the tax bracket? The answer to both the questions is yes.
It is beneficial to keep your income tax refund closer to zero to have more access to your income throughout the year. Paying more taxes and ultimately getting money back after being locked up does no good.
Similarly, irrespective of whether you have any tax liability, one should file a tax return. This has various benefits of its own.
For one, it saves you from any IRS penalties for not filing the tax return. Further, it provides other financial benefits in the future. It is also essential to file your tax return for certain tax credits available to those with zero tax taxable income. Even if, to your knowledge, you may not be eligible for a refund, there are chances you may get a tax credit refund of up to $1,000. Moreover, a refund hitting your account is always welcome.
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