Tax refund

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Not to be confused with Tax return (disambiguation).
For the United States economic stimulus rebate, see Economic Stimulus Act of 2008.

A tax refund or tax rebate is a refund on taxes when the tax liability is less than the taxes paid. Taxpayers can often get a tax refund on their income tax if the tax they owe is less than the sum of the total amount of the withholding taxes and estimated taxes that they paid, plus the refundable tax credits that they claim. (Tax refunds are money given back at the end of the financial year.)

By country[edit]

United States[edit]

According to the Internal Revenue Service, 77% of tax returns filed in 2004 received a refund check, with the average refund check being $2,100.[1] In 2011 the average tax refund was $2,913. [2][3] Taxpayers may choose to have their refund directly deposited into their bank account, have a check mailed to them, or have their refund applied to the following year's income tax. As of 2006, tax filers may now split their tax refund with direct deposit in up to three separate accounts with three different financial institutions. This has given taxpayers an opportunity to save and spend some of their refund (rather than only spend their refund).[4][5] Every year, a number of U.S. taxpayers around the country get tax refunds even if they owe zero income tax. This is due to withholding calculations and the earned income tax credit.[6] Because withholding is calculated on an annualized basis, an individual just entering the work force or unemployed for a long period of time will have more tax than is owed withheld. Refund anticipation loans are a common means to receive a tax refund early, but at the expense of high fees that can reach over 2,000% annual interest.[7] In the 1990s, refunds could take as long as twelve weeks to come back to the taxpayer; however, the average time for a refund is now six weeks, with refunds from electronically filed returns coming in three weeks.[8]

Some people believe that getting a large tax refund is not as desirable as more accurate withholding throughout the year, as a large refund represents a loan paid back by the government interest-free. Optimally, a return should result in a payment owed of just less than would cause a penalty charge, which is 100% of the prior year's tax (110% for high income individuals), 90% of the current year's tax, or $1,000 for individuals who have direct withholding and do not pay estimated tax. In order to decrease the amount of the tax refund which has to be received by taxpayers, they can turn to one or several of the following methods:

However, some people use the tax refund as a simple "savings plan" to get money back each year (even though it is excess money that they paid earlier in the year). Another argument is that it is better to get a refund rather than to owe money, because in the latter case one might find oneself without sufficient funds to make the necessary payment. When properly filled out, the Form W-4 will withhold approximately the correct amount of tax to eliminate a refund or amount owed, assuming the W-4 was filled out at the beginning of the tax year.[10]

A U.S. federal law signed in 1996 contained a provision that required the federal government to make electronic payments by 1999. In 2008, the U.S. Treasury Department paired with Comerica Bank to offer the Direct Express Debit MasterCard prepaid debit card. The card is used to make payments to federal benefit recipients who do not have a bank account. Tax refunds, however, are exempt from the electronic payments requirement. However, many U.S. states send tax returns in the form of prepaid debit cards to people who do not have bank accounts.[11]

New Zealand[edit]

In New Zealand, income tax is deducted by the employer under the PAYE (Pay As You Earn) tax system. This information is collected and held by the Inland Revenue Department (New Zealand) (IRD) and is not automatically processed. However individual earners can request a summary of earnings to see if they have overpaid or underpaid their tax for each given financial year. To claim a tax refund, a personal tax summary must be filed; this can be done by dealing with the IRD directly or through a Tax Agent. If a personal tax summary is requested in a situation where tax would be owing, a debt is created, so correct calculations prior to this request are important, and these core services are offered by third party Tax Agents. Tax Agents in New Zealand are largely self-regulating, with the Online Tax Association of New Zealand (OTANZ) providing guidance and governing rules for New Zealand's largest 3 tax refund agencies whom serve most of the market for personal tax refunds.

India[edit]

In India, there is a provision of refund of excess tax along with interest. For claiming a refund one has to file the income tax return within a specified period. However, under Sections 237 and 119(2)(b) of the Income Tax Act, the Chief Commissioner or Commissioner of Income Tax are empowered to condone a delay in the claim of a refund.[12]

Ireland[edit]

In the Republic of Ireland, income tax is deducted by the employer under the PAYE (Pay As You Earn) tax system. If incorrect tax credits are applied by the employer, then a refund of tax is due. Tax refunds may also be due for income deductions that are applied after the tax year has ended, if one finishes working prior to the year end, or for joint assessment of taxes for a married couple. Tax refunds must be claimed within four years of the end of the tax year if the one is assessed under the PAYE tax system.

References[edit]

  1. ^ FDIC: FDIC Consumer News Winter 2004/2005
  2. ^ USA Today page 1B published April 13, 2012 "Tax refund provides cash to file bankruptcy"
  3. ^ http://www.greenbaypressgazette.com/article/20130104/GPG03/301040162/Changes-don-t-worry-tax-preparers
  4. ^ http://www.irs.gov/businesses/small/article/0,,id=161493,00.html
  5. ^ Where's My Refund?
  6. ^ Notice 797 (Rev. December 2007)
  7. ^ Income Tax Refund Loans: Taxpayer Rip-off. About.com.
  8. ^ Tax Topics - Topic 152 Refund Information
  9. ^ Using your 2012 tax-year return to plan for the future Presti & Naegele Accounting Offices
  10. ^ IRS Withholding Calculator
  11. ^ “Federal government chooses direct deposit and prepaid cards over mailing checks”, BankCreditNews, 15 Apr 2013, Accessed 22 Apr 2013
  12. ^ "Whether Board should condone delay if failure to condone delay causes genuine hardship to assessee, no matter whether delay in filing return is meticulously explained or not - Held, yes" 167 TAXMAN 238 (ker.) Pala Marketing Co-operative Society Ltd. v. Union of India WP (C) No. 21977 of 2007 (N) (November 26, 2007)