What is a Tax Refund?
For example: If your Tax Liability was $3,600 but you withheld $6,000 (money your employer sends to the Government every payday on your behalf) then you sent $2,400 more than necessary. Once you complete your Tax Return, the IRS sends the overpayment of $2,400 back to you in the form of a Federal Income Tax Refund.
Here is an illustration (using the example above): You have a safe in your house. This safe is where you put all your tax money every pay period for an entire year. The safe can not be opened until April 15th next year. Every month you put in $500 for income taxes. By the end of December that safe has $6,000 and is just sitting there, not collecting interest or being used to pay bills, buy things, or even invest. April 15th comes around and you can open the safe, give Uncle Sam his $3,600 and keep the extra $2,400. WOW! It’s like free money, right? RIGHT?
The next article will explain how to adjust your W-4 (tax withholding) to make sure the right amount of money is withheld so that you shouldn’t owe or that you get the right refund next year.
Read the other articles within this series: