A tax refund in the US is the result of overpaying taxes during the year, which is returned to the taxpayer. Some view it as forced savings, while others see it as an interest-free loan to the government. Tax preparation and planning can help avoid overpaying taxes. Consulting a tax professional may be necessary for complex situations.
In the United States, a tax refund is the result of withholding taxes on earnings that amount to more than what a person owes in income taxes during a calendar year. Federal and state taxes are withheld in a specified amount each pay period, and at the end of the year, each taxpayer must file income taxes by filing the appropriate filing forms. In many cases, people have paid more than they should have paid. When the federal government or state treasurer receives the tax forms, they write checks for the overpayment, which is the refund.
Some people see a tax refund as forced savings, while others see it as money they allowed the government to borrow without interest. Those who wish to receive a large refund each filing year may deliberately set their withholdings higher than necessary. This increases the amount of money they get from your tax refund. However, many people mistakenly view their refund as free money, forgetting that it was money they earned in the first place. Unless a large tax refund is treated as savings or invested, it’s often better to receive your money each pay period rather than a lump sum at the end of the year.
Those who view a tax refund as an interest-free loan to the government take the time to do careful tax preparation and planning each year to avoid paying more tax each pay period than they have to. Tax preparation involves estimating your eligible deductions and credits each year to get an approximate tax total.
In some situations, tax planning and preparation is complex, while in other situations it is simple. Computerized tax preparation software used to prepare a tax return generates questions for users to help them prepare for the upcoming tax year. While this software may be useful for some, many require the assistance of a professional service. For people with interest income, self-employment income, or other unique situations, consulting with a tax professional may also increase your tax refund for the filing year. Fees for services will vary depending on the complexity of your tax situation, but the more complex the situation, the better off it is in the hands of a professional who is familiar with all applicable tax laws.
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