Many taxpayers feel very stressed when tax season begins. They also seem to feel like there’s only one good thing that comes out of it, which is a tax refund. Many people depend on their yearly refund since that money helps fill the retirement fund or make an extra mortgage payment. However, for every one of you out there who still aren’t sure how tax refund works, read through this article, and you'll understand everything about tax refunds.
These are the basic rules and things that everyone – including business owners – should know.
How to Get Federal and State Tax Refund?
If you’ve got a tax refund, it’s something you would want to celebrate. However, in reality, it means that you paid more income tax than you should have, and that’s why you got a tax refund. Hiring a professional accountant tax return process makes your life a lot easier if you’re not familiarized with how the entire process works.
This mistake can quickly happen if you’re working for an employer. You’re obliged to file a W-4 form upon being hired. In this form, the detail you need to include is the amount of taxes that should be withheld from every one of your paychecks.
It often happens that taxpayers receive a refund at the end of each year if too much money is withheld. In case you’re self-employed, you’ll get a tax refund only if you’ve overpaid the estimated tax amount. Even if you consider this money to be "free money", it’s not. It’s not good since it was your money you gave to IRS for a year without charging any interest.
Learn Everything About Entire Tax Refund Process
When the government gets your tax return and processes all your information, you’ll get official approval for a refund before they send you the money. This process may vary, and it’s closely related to the way of how you file your taxes.
If you file for a tax refund electronically, tax refunds are usually sent in three weeks since IRS received your information, but you may end up waiting for up to 12 weeks for your money to show up. Additionally, all refunds filed on paper need anywhere between six to eight weeks to arrive.
In the case that your tax refund is delayed, the reasons for the delay can be either because of budget cuts, overwhelmed tax preparers, or merely a result of mistakes. All return dates provided by the IRS are estimates, not fixed dates. Therefore, it’s never a good idea to count on using your refund for important purchases since there are no guarantees on when you’ll get your refund.
Some people often take a refund anticipation loan from banks to make the purchase they want, but it’s never a good idea since you’ll have to get the same amount back with hefty interest and fees.
How to Claim Your Tax Refund?
There’s are several ways to receive your tax refund. You can either request the government to send you a paper check via mail, or you can opt-in for a direct tax refund deposit and receive your money into three different places, including a retirement account and savings.
You need to claim your refund in three years upon filing. In case you’re granted an extension, you can also ask for your refund three years after the extended deadline.
However, it’s not possible to keep your entire refund in some cases. If the IRS makes a mistake and sends you a bigger refund than you were meant to get, you’ll have to repay the difference to the IRS. People who owe for child support or even have overdue student loan bills may receive lower tax refunds than they were hoping to get. In case you receive a more considerable amount than you were expecting, make sure you check if there’s been any mistake by the IRS before you go out and spend it all in the mall.
If you get a significantly smaller refund check than you expected, you shouldn’t be surprised since it's been the standard practice ever since the 2019 tax filing season. President Trump’s tax plan took effect two years ago. The new law did result in somewhat bigger paychecks, but it also resulted in lower refunds. In some cases, people who received refunds found themselves in a situation in which they owe money to the government.
Moreover, make sure to consider taxes when you’re selling a business to avoid any potential complications with the IRS – consider the income tax you have to pay when you sell your business since it’ll help save you from a lot of trouble. Selling a business is considered as any other transaction that brings you money. It’s considered as income, and the law requires you to pay taxes on it. The classification of this income is known as capital gain, and it applies in cases when you’re either selling company’s stocks, assets, or even the entire company.
Related: Documents Needed for Selling a Small Business
What to Do If You’re Missing Your Tax Refund?
When filing for taxes, your primary concern is when your tax refund will arrive. The good thing is that the IRS’s website has a tool that’ll help you find all the information you need.
Upon clicking on the Where’s My Refund link, you need to enter either your taxpayer identification number or Social Security Number (SSN). Moreover, you need to provide the refund amount and filing status. Upon performing all these steps, the tool will let you know if there are any problems with your federal tax refund.
Your refund may really be missing in case you’ve moved recently. However, make sure that you update your address online, and the IRS will provide you with a replacement check.
Tax Code Changes from Last Year
A lot of tax code pieces have shifted recently, which makes it very difficult to distinguish why some taxpayers are more affected by this than some others. There’s one place where a lot of people will most likely feel this impact, and it comes from changes made to withholding tables.
These tables are guides that employers follow up on so they’d know the right amount they need to deduct from employees’ paychecks as an income tax. With the new law, a lot of people have seen that less money has been taken out of their paychecks, which also led to a lot of smaller tax refunds
Some other changes to the tax law also include the implementation of a higher deduction standard. For single-filers, the numbers rose to $12,000, and married couples weren't exempt either. For married couples that are filing together, the amount is set at $24,000. Moreover, a higher child tax credit has doubled from $1,000 to $2,000 per child.
How Are These Tax Changes Affecting Everyone?
People at higher risk of a small refund are taxpayers without dependents, homeowners in states with high taxes, and employees with outstanding business expenses that haven’t been reimbursed.
On the other end, families with children that are under 17 years of age will most probably receive a higher refund since child tax credit has jumped in size under this new law. Families with children can expect $2,000 for each qualifying child with an additional $500 credit for all other dependents that are qualified.
Why Are These Changes So Significant?
The tax season has just begun, and it’s too soon to determine the number of taxpayers that are expected to get their tax refund this year. The IRS stated that during the 2018 tax season, around 70% of taxpayers had received their refund.
People aren’t used to changes this significant, especially when it comes to tax refunds. A lot of taxpayers depend on this money and have been waiting to get it back for the entire year. It’ll take some time for the new law to take its place and make everyone feel normal and back on their feet. Until that happens, people can only hope to get their tax refund in time without being significantly affected by the changes it brings.
People that still have student loans to pay off or that are consistently carrying a balance on their credit cards may find all these changes pretty hard. For them, it’s better to use the overpay in tax withholding for paying up those debts. By doing so, they’ll avoid owing more interest over time. If you’re afraid that you might end up paying the government when the year ends, using the withholding calculator can be very helpful. Find it on the IRS’s website, and you’ll see the exact amount that should be withheld.
Final Thoughts
Getting your tax refund is pretty exciting, and many people see it as a gift or free money. It's worth noting that there's no free money, and a tax refund is money you willingly gave to the government. While it’s much easier to accept a refund than updating a W-4 form, you might want to consider having the correct amount withheld from all your checks, so you wouldn’t end up not receiving a refund at all.
Finally, if you’re relying on your refund each year, consider having a proper financial plan so you’d get yourself on a firm financial footing. Working with a financial advisor is helpful since he’ll assist you with investing your money carefully and help you build a great financial plan. It’s much better to plan everything accordingly than to suffer from mistakes made by calculating your taxes wrong.
