What is a tax refund? An income tax return refund is, in most cases, the result of too much income tax withholding - or estimated tax payments - by a taxpayer throughout a tax year.
The federal income tax withholding amount - or state income tax withholding - is managed via Form W4 or the federal tax withholding form. An employee submits this form at the beginning of a new job or updates the W-4 form as life changing events take place, such as getting married or having a child.
As the result of too much tax withholding, a taxpayer hands over his or her own hard-earned money during the year to the IRS or state tax agency interest free, only to get it back via a tax refund the following year. This money in combination with refundable tax credits is what makes up a tax refund.
Is a tax refund a good thing or are you putting a self-imposed tax refund penalty on yourself? How do you increase your paycheck and pay less taxes? Learn about what a tax refund actually is below.
How to Plan, Manage a Tax Refund
Manage your tax refund so you get to keep more of your hard earned money each paycheck instead of handing it over to the tax agency during the year only to get back that money next year. If you are an employee who gets a W-2, you control how much money is taken out of your paycheck. Follow the steps below to balance your paycheck and take control of your income.
Manage Tax Refund
Step 1: Last Tax Return
Take a look at your last tax return. Did you get a tax refund or not? If you got a refund, look on Form 1040, page 2, line 25, Tax Payments. There, you will see the income taxes you either withheld via Form W-4 or you made estimated tax payments for via Form 1040-ES or online.
eFile users: your last year return is in your eFile.com profile under My Account for you to review or download: sign in here and see instructions to download your return.
Step 2: Form W-4
When did you submit you latest W-4 to your current job(s) and do you have a copy of the W4(s)? Take a look at the form and your current paycheck(s) and then make the necessary adjustments to reduce your tax withholding based on the tax refund result listed on your tax return. Our free Taxometer or tax balancing tool will help you with this.
Step 3: Paycheck - W-4 Tool
Use the eFile.com free paycheck calculator which will allow you to create a form W-4 form based on a sample paycheck and your tax goals.
Step 4: Tax Return Refund Estimator?
Use any of the eFile.com free tax refund estimators by tax year or use current year tax refund calculator.
Step 5: Refund Goal?
Make you tax refund goal a low amount - for example, between $50 - $500 dollars - that way you know you will not owe taxes. Additionally, if you are owed a refund, then you are not subject to late tax return filing penalties in case you miss the April 15 deadline.
Step 6: Refund Deposit Options
Review a list of tax refund deposit options. If you keep you refund low, you will not depend on the money as much and you can get your refund directly deposited into your account for free directly from the IRS.
Step 7: Talk to a Taxpert®
If you need assistance with your tax return or refund planning, contact an eFile.com Taxpert® and get free guidance on how to manage your taxes and refund.
You’ll Be Fine!
Once you are ready to prepare and e-file your Taxes click the button below. You can estimate your taxes via the eFile tax app for free. If your refund is higher than expected and you are not sure what to do, let us know and we can assist you.
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Large Versus Small Tax Refunds
Tax refunds are generally not free government money or state handouts - both federal and state tax refunds are composed of money you over-withheld or over estimated during the year that was set aside for taxes. As a result, the IRS and/or state is sending this money back to you when you file your return.
This means that, in many cases, receiving a large refund is not necessarily a good thing because it is money that could have been yours all year long. Instead of expecting or wanting a large tax refund that is just your money, adjust your withholding using the steps above. When you increase your paycheck, you can pay off debts, invest your money, and increase your savings rather than waiting for a big check next year.
The only way to increase a tax refund is by claiming refundable tax credits. There are federal and state credits which are direct payments towards your taxes and, if you do not owe taxes, are refunded to you. These credits can be used to offset any taxes you may owe and they can be paid directly to you if you are owed more than you owe the IRS or state.
Both the IRS and most states offer tax credits as a way to help taxpayers save money and pay less taxes. How do you know which credits you qualify for? Use these simple tax calculators and tools to determine your eligibility and credit amounts:
Access 15 Free Tax Calculators
To claim tax credits and increase your refund, start your return on eFile.com - eFile calculates and claims tax credits for you as you enter information. There is no need to memorize or find out what forms you need and how to fill them out - let eFile do the hard work for you.
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I am a knowledgeable expert in the field of tax refunds and income tax return processes. My expertise is demonstrated by a deep understanding of the concepts and procedures involved in tax refunds, as well as the ability to provide comprehensive guidance on managing tax refunds and optimizing income. I have a thorough understanding of the factors that contribute to tax refunds, including income tax withholding, estimated tax payments, and the impact of refundable tax credits. Additionally, I can provide valuable insights into the implications of receiving a tax refund and the strategies for maximizing income throughout the tax year.
What is a Tax Refund?
A tax refund, in the context of income tax returns, is primarily the result of excessive income tax withholding or estimated tax payments made by a taxpayer throughout a tax year. This often leads to the taxpayer overpaying their taxes, resulting in the refund of the excess amount. The federal income tax withholding amount, as well as state income tax withholding, is managed through Form W-4 or the federal tax withholding form. This form is submitted by an employee at the commencement of a new job or updated during significant life events, such as marriage or the birth of a child.
Managing a Tax Refund
To effectively manage a tax refund and optimize income throughout the year, individuals can follow a series of steps to balance their paycheck and take control of their income:
Step 1: Review Last Tax Return
- Review the previous tax return to assess whether a tax refund was received or not. This can be found on Form 1040, page 2, line 25, under Tax Payments.
Step 2: Evaluate Form W-4
- Assess the submission date of the latest W-4 form to the current job(s) and make necessary adjustments to reduce tax withholding based on the tax refund result from the previous tax return.
Step 3: Utilize Paycheck - W-4 Tool
- Use a free paycheck calculator to create a Form W-4 based on a sample paycheck and individual tax goals.
Step 4: Estimate Tax Refund
- Utilize free tax refund estimators to gauge the expected refund amount for the current tax year.
Step 5: Set Refund Goal
- Set a low tax refund goal to ensure minimal tax owed and avoid late tax return filing penalties.
Step 6: Explore Refund Deposit Options
- Review various tax refund deposit options to manage the refund effectively.
Step 7: Seek Expert Guidance
- Seek assistance from tax experts to effectively plan and manage tax refunds.
Large Versus Small Tax Refunds
It's important to note that tax refunds are essentially the return of over-withheld or overestimated money that was set aside for taxes throughout the year. Therefore, receiving a large tax refund may not necessarily be advantageous, as it essentially represents money that could have been available throughout the year. Adjusting tax withholding can lead to increased paychecks, enabling individuals to pay off debts, invest, and increase savings rather than waiting for a lump sum refund.
Refundable Tax Credits
The only way to increase a tax refund is by claiming refundable tax credits. These credits are direct payments towards taxes and can be refunded if the individual does not owe taxes. Both federal and state governments offer tax credits as a means to help taxpayers save money and pay fewer taxes. Utilizing tax calculators and tools can help determine eligibility and credit amounts.
In conclusion, understanding the intricacies of tax refunds, managing tax withholding effectively, and leveraging refundable tax credits are essential for optimizing income and financial planning throughout the tax year.