Tax refunds are one of the biggest perks of filing your taxes. Depending on factors like income, American taxpayers could get back hundreds to thousands of dollars. The problem is it can take a while. This year alone, millions are waiting for theirs despite filing promptly.
Now, taxpayers do have options if they want money now, like tax preparer bank products. If a client expects to receive a tax refund but cannot pay the tax preparer’s services, the latter can work with banks to get these fees from the expected refund. The rest will go to the client, so none would have to wait for long.
Nevertheless, it helps to understand how tax refunds work and why they can get delayed.
What Is a Tax Refund?
A tax refund is a refund of money to taxpayers after they calculate their taxes. A person calculates their income tax by subtracting the amount of money they earned from taxable sources (wages, self-employment business earnings) from the total amount of money earned before any deductions were taken out (gross pay).
This difference is then multiplied by an income tax rate. If the person owes less than they initially calculated, then the difference is refunded to them by the government.
A tax refund can also occur after withholding money from an employee’s paycheck for their income taxes. If the withholding from an employee’s paycheck exceeds the amount of money they owe, then the difference is given back to them as a refund. In this case, a tax refund can also be called a “tax return.”
Most tax refunds occur because of overpayment of taxes that were withheld from an employee’s paychecks throughout the year.
Tax refunds are often confused with other terms like “tax deductions,” “tax credit,” and “tax rebate.” Here are their differences:
- Tax Deduction: It reduces the amount of taxable income that someone reports to the IRS. The person calculates their tax by first adding up all of their taxable sources of income and then subtracting any potential deductions. You can claim two kinds of deductions: itemized and standard. However, you cannot claim both.
- Tax Credit: It is a dollar-for-dollar reduction in the amount of taxes owed. A person calculates their total possible income tax by multiplying their gross income by their tax rate. They can reduce this amount by claiming any available tax credits and, consequently, will owe less taxes than if they didn’t claim the tax credit.
- Tax Rebate: It is a one-time payment made when a condition in a previous or future purchase has been fulfilled. A person would receive a tax rebate after buying a vehicle or equipment or completing their last school year.
What Is an E-File Refund?
An e-file tax return is one that someone files through an online process. The person can either file independently or hire a professional, such as a tax preparer, to do it for them. When a person chooses to e-file, they will either receive their tax refund in the mail or have it directly deposited into their bank account.
People who e-file usually receive their tax refunds more quickly than those who file a traditional paper return by mail. In addition, those who owe taxes and those with simple tax situations are likely to have a faster refund.
How Soon Does Someone Receive a Tax Refund?
In general, one should expect a tax refund (if they’re entitled to one) within 21 days after they filed electronically or around 42 days if they opted for paper filing. However, there are instances when it can be much longer.
1. Government Shutdown
The government can shut down if Congress does not agree on legislation that will keep federal money flowing. If this happens, anyone who submitted their tax return before the shutdown will receive their refund. However, anyone who files after the shutdown would not receive their refund until the government reopened.
While this may sound impossible, it did happen quite a few times. The Biden government almost experienced it this year.
2. Incorrect Information
A person can file their tax return and later find out that some or all of their information was incorrect. If this is the case, they will have to amend their return by filing a new one with the correct information.
Once the IRS receives the newly filed return, they will process it and send out any needed tax refunds. A taxpayer can then track their refund status.
3. Fraud Prevention
The IRS uses fraud-prevention tactics to ensure that taxpayers are receiving only what they deserve. Because of these tactics, some refunds are held back until the IRS finishes its review.
4. Math or Other Error
If a taxpayer claims certain credits, deductions, or exclusions that are more than their tax liability, an error will occur. The refund could be reduced by several thousand dollars. The IRS will hold off the refund until this error is corrected and they complete their case review.
When it comes to tax refunds, patience is a virtue. Even if a person does everything right and within the time frame, there are instances when it would not be processed until much later. This is typical of all types of refunds, including e-file tax returns.
If they want to avoid further delays, tax preparers can help by submitting their returns electronically and providing options like bank products.