Tax refund

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In the United States, taxpayers will get a tax refund, a refund on their U.S. income tax, if the tax they owe is less than the sum of:

The total amount of refundable tax credits that they claim.
The total amount of withholding that they paid.

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] 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, taxfilers 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 excellent opportunity to save and spend some of their refund (rather than only spend their refund).^[2]^[3]

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.^[4] 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.^[5] 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.^[6]

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).

However, some people use the tax refund as a simple "savings plan" where they're pleasantly surprised to get money back each year (even though it is excess money that they paid earlier in the year).^[7] 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 money in the checking account to pay 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.^[8]