The IRS has moved early and hard this year in processing the reimbursements to millions of citizens. It is part of the excess amount paid in taxes to the state or federal government. Taxpayers generally look at refunds as a stroke of luck. But instead, it was in the form of an interest-free loan that filers paid to the government. It is often possible to end up overpaying taxes. So it becomes necessary for the IRS to issue a tax refund stimulus check to restore parity.
So if a tax refund stimulus check ends up in your mailbox, then it is likely that you have overpaid your taxes during the previous tax year. You may have also earned a refund if you qualify for a refundable tax credit, including the Earned Income Tax Credit, the Child Tax Credit, and the premium tax credit.
As an employee, you can avoid ending up overpaying by accurately filling out the W-4S. You also need to make sure that the information you give is accurate and current. Self-employed taxpayers can avoid ending up paying more by estimating their quarterly taxes with greater accuracy.
A tax bill is just the opposite of a tax refund, which you end up owing if your employer failed to withhold sufficient taxes from your gross income.
Making Sense Of The Tax Refunds In The Absence Of A Stimulus Check
In a year when there are no stimulus checks from the federal administration, it feels exciting to end up getting a generous tax refund in the mailbox. You may have overpaid taxes in the previous year. Generally, such things can happen if taxes are deducted from an employee’s paycheck every time they get paid by their employer.
Some of the reasons for a taxpayer getting a refund include making an error in filing Form W-4. This form is used to arrive at the correct amount to be withheld from the employee’s paycheck. A filer may also get a tax refund if they forget to update their W-4 to include certain life changes including childbirth and an extra child tax credit stimulus check.
A self-employed person, including freelancers who file their returns quarterly, may end up overpaying to avoid an unexpected tax bill or an underpayment of penalties at the time of tax.
Getting A Refundable Tax Credit
Tax credits are generally refundable. It means that the tax credit can only reduce the liability of a taxpayer to $0. The amount that remains from a non-refundable tax credit gets forfeited automatically by the taxpayer. This is the reason this form of the tax credit is also referred to as washable tax credit.
The filer is also eligible for the refundable tax credit. it can significantly reduce the amount of tax that a person owed and can drag it down into negative figures. So consequently, if the credit turns out to be larger than the tax bill, the filer will get a refund stimulus check for the difference in the number of tax refunds and tax bills.
If the tax credit reduces the tax liability to below $0, the taxpayer gets a stimulus check for the entire refund amount, which is the stimulus check amount less the tax amount paid.
Refundable credits include the Child Tax Credit payments. The CTC stimulus check received widespread acclaim in its expanded version when it was revised through the American Rescue Plan Act of March 2021. From the annual $2,000 it was increased to between $3,000 and $3,600 per child based on their age. It helped significantly reduce poverty among children and their families.
But it has reverted to its older version and parents get only $2,000 per child. And of this maximum amount, the fully refundable potion is $1,500 for 2022 and $1,600 for 2023.
The Earned Income Tax Credit gave low and moderate-income workers and their families a generous tax break. The credit for this stimulus check ranges from $6,935 in 2022 and $7,430 in 2023. The credit amount received by taxpayers is linked to their income, the number of children, and their filing status. For instance, eligible filers who are childless will get a stimulus check worth $500 for the 2022 tax year.
The American Opportunity Tax Credits are tax credits that are partially refundable and available to filers to offset expenses for qualified higher education. If filers reduce their liability to $0 before using the full portion of the $2,500 tax deduction, the remaining amount may be taken as refundable credits. This amount is the least of the 40% of the remaining credit, which is $1,000.
Low and moderate-income households also qualify for the Premium Tax Credit. The PTC lowers the premium paid every month for health plans that are routed through the state and federal government’s health benefit exchanges. Taxpayers can use all, a part, or none of their PTC amount up front. For filers who use less PTC than they are entitled to, they will get the amount as a refundable tax credit during tax time.
Working Of The Refundable Tax Credit
Income tax refunds are usually issued as stimulus checks and sent through the US Postal Service or as direct deposits to the bank account of the taxpayers. Taxpayers can also use the refund to purchase Savings Bonds from the US government. The fastest way that a filer can get a refund is by e-filing their income tax return and choosing the direct option.
Most refunds go out within a few weeks after the taxpayer files their income tax return. But the refunds may be delayed in some cases. For instance, filers who claim the EITC will not get the stimulus check before March of any year. That is because under the law the IRS has to hold on to such refunds till March as there have been numerous instances of fraudulent filing of this particular credit.
While refunds are always welcome, the correct process would be to ensure that you do not overpay in the first place. For this, you need to correctly fill out the W-4 and correctly calculate the tax payable. The nearer a taxpayer gets to bring down their refund amount, the more money the filer will have in hand throughout the year.
