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A Short Overview on Tax Refunds

A Short Overview on Tax Refunds Background on Tax Refund

The American system of taxation allows for certain circumstances in which citizens may be eligible for a refund of the payments they have made or are otherwise obligated to under law, as is also the case in several other countries. In general, the majority of American taxpayers in any given tax year will be found eligible for some kind of tax refund. In the 2010s about three-fourths of the population was usually found eligible for this benefit. 2004, for instance, saw 77% of the tax returns processed by the IRS that year being accorded refunds. 

The rate at which tax refunds may be offered to American taxpayers has increased apace with the general strides in efficiency brought in by the introduction of electronically-based methods for storing and transmitting information. In the 199s the IRS took at most twelve weeks to deliver tax refunds to applicants accepted for the benefit, while in the 2010s this time frame was reduced to six weeks, with filings made via electronic documents being enacted even more quickly, at most in three weeks.

Provisions and Calculations

In determining the extent of the tax refund which they can gain, American taxpayers should pay attention to the different expenses which are required of them over the course of a year. In requesting that the IRS or the relevant state department consider them eligible for a refund, taxpayers can either request that the refund be paid directly to them that year or they can ask for it to be applied to their tax burden in the following year. 

If they choose the first option, the refund can be provided in either paper or electronic form, as either, respectively, a check mailed to the taxpayer, or as a deposit directly placed in their bank account. As many as three separate bank accounts can be designated for deposit, granted that these are in amounts of over a dollar. The IRS provides for this option to be applied for except when the taxpayer has already filed an "Injured Spouse Allocation" form.

Statistics

The approximate three-fourths of the American taxpaying population that has consistently been accorded some kind of tax refund over the course of the 2010s on average receives between two and three thousand dollars toward this end. Both the rate at which tax returns have been accorded tax refunds and the amounts that have thus been awarded have steadily risen. At an earlier point in the decade, taxpayers tended to be awarded refunds of amounts around $2,300, in contrast to which 2008 was noted for an average amount of $2,693 being given in tax refunds that year, in which 77% of taxpayers were accorded such benefits. 

Statistical studies have shown, other than the general increase in the use of the option, a tendency for taxpayers who file earlier in the year to receive higher refund payments, on average of $2,869, and to stand better chances of being given any refund at all, with an eligibility rate of 82%. 

In this way, studies have argued against the tendency for Americans to file their tax returns later rather than sooner, an option chosen by 60% of taxpayers, and have pointed to the benefits presented to, for instance, lower-income taxpayers, with one-fourths of taxpayers receiving refunds enjoying annual incomes of less than $25,000.

Reasons for Tax Refund

The IRS provides tax refunds to American taxpayers according to the withheld and estimated taxes paid by the applicable taxpayer over the course of the year and the refundable tax credits which have been applied to his or her tax liability over the course of the year. Eligibility for a tax refund can be found if the sum of the taxes paid for these reasons and the credits given out are greater than the tax burden placed on the taxpayer. Of the three factors considered by the IRS, withheld taxes are the most commonly cited and the most applicable. 

Taxes are withheld in this way by being regularly taken out of the paychecks given out on a weekly or biweekly basis to the taxpayer, a procedure followed to ensure that the government receives the individual's income taxes, as well as payments required for support of Social Security and Medicare. Estimated taxes refer to any kind of taxable income that is not liable to withholding, which can essentially include all of the kinds of employment that are not compensated with a paycheck regularly issued by an employer. A common source for a refundable tax credit is through the means-tested earned income program, which is a method employed by the US government to ease the tax burden of lower-income taxpayers.

Refund Anticipation Loans

American taxpayers who are found eligible for a refund by the government can secure its financial benefits even before they have received the actual payment. The means for doing this is to apply for a refund anticipation loan, which is done alongside the application for the actual loan. Tax preparation services which generally deal with the filing of tax returns can also attend to this particular procedure, for which they will charge a small fee. This option has been available since the 1980s, when the IRS introduced an electronically-based system. 

The tax anticipation loan will be granted to the applicant after the lender has received confirmation from the IRS that a tax refund has been provisionally approved. The practice has received criticism from some commentators, who have drawn attention to what they consider the high rates required for these loans, as well as the general lack of a pressing need for them. 

To back up this criticism, such critics have pointed to the predominant use of the resource by lower-income taxpayers, who may both be in greater need of quick infusions of cash and more vulnerable to unfair deals. Per these criticisms, the popularity of refund anticipation loans, which saw 12 million being issued in 2004, has diminished with the IRS's introduction of electronic filing of tax returns, which has accelerated the overall process and narrowed the window of time in which a loan would be needed.

Calculating Refund

Taxpayers who wish to know exactly how much is due to them in terms of tax refunds can make use of the various tax refund calculator services that are commercially available for use. The main factors to be taken into consideration by such a service, as mentioned above, include the actual amount paid by the taxpayer over the course of the tax year, particularly in regard to withheld taxes, and the overall tax burden which is placed on the taxpayer. 

The general tax burden is determined by the income bracket into which a taxpayer is placed. Withholding from paychecks is determined by the claims which an employee makes in his or her W-4 form, as will be required for completion by an employer. Any dependents which the taxpayer might claim, for instance, will be considered in terms of withholding money from paychecks. Tax refund calculators will determine if the amount paid by the taxpayer exceeds her or his tax liability, and accordingly recommend that the taxpayer apply for a refund.

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