What Is a Tax Refund?

How Do Tax Refunds Work?

The deadline to file your annual tax return usually falls on April 15 of the following year. If you're a regular employee, you'll use form W-4 to specify how much to withhold from each paycheck for federal taxes. Freelancers and self-employed workers typically pay estimated quarterly taxes.

But how much you actually owe in taxes each year depends on the following factors:

1. Your income: This is the amount of money you earned in wages, business income, investment gains, unemployment benefits and so on.
2. Your tax bracket: Tax brackets are income ranges that are used to calculate your tax rate, which shapes how much you'll owe the federal government. State and local taxes may also apply.
3. Tax deductions: If eligible, you could use tax deductions to reduce your taxable income. You can either take the standard deduction, which allows you to write off a flat dollar amount based on your tax-filing status, or itemize your deductions. (Some deductions require taxpayers to itemize.)
4. Any taxes you've already paid: Any amount you've already paid through automatic paycheck deductions or quarterly tax payments will be deducted from your total tax liability.

Compare tax preparation services

You could save time preparing your taxes, and get assistance maximizing your refund. Plus, many services provide audit assistance to give you confidence when you file.

Refundable Tax Credits

Unlike tax deductions, which lower your taxable income, tax credits reduce your actual tax bill dollar for dollar—and that could lead to a larger tax refund if you qualify for refundable tax credits. These could reduce your tax bill to zero and allow you to pocket any additional money that's leftover.

Example: Say your tax bill comes to $1,500, but you qualify for a $2,000 refundable tax credit. You'd receive that $500 difference in the form of a tax refund.

Earned Income Tax Credit (EITC)

The earned income tax credit provides relief to low- to moderate-income taxpayers. To qualify for the EITC, you must have earned income during the tax year, and your adjusted gross income (AGI) must be within a certain range set by the IRS. Eligible taxpayers receive a larger credit if they have children.

• Single, head of household or married filing separately: Income range is $19,104 to $61,555, depending on how many children you have.
• Married filing jointly: Income range is $26,214 to $68,675, based on the number of dependent children.

Additional Child Tax Credit (ACTC)

The additional child tax credit (ACTC) is the refundable portion of the child tax credit (CTC). The CTC is worth up to $2,200 per qualifying child—but if your federal tax liability is less than this amount, you might be eligible for the ACTC. This could unlock up to $1,700 per qualifying child.

To qualify for the full CTC amount, your annual income cannot exceed $200,000 (or $400,000 if you're married filing jointly). You and your dependents must also have valid Social Security numbers, and each child must meet the following criteria:

• Be a U.S. citizen, U.S. national or U.S. resident alien
• Be under 17 when the tax year ended
• Be your child, stepchild, eligible foster child, sibling, stepsibling, half-sibling or a descendant of one of these relations
• Be claimed as a dependent on your tax return
• Live with you for more than half of the tax year
• Not provide more than 50% of their own financial support during the tax year
• Not file a joint tax return for the tax year (some exceptions apply)

American Opportunity Tax Credit (AOTC)

If you're in the first four years of your college journey, you might get a break on qualified education expenses you paid during the tax year. The AOTC is worth up to $2,500 per qualifying student. If there's anything left over after satisfying your tax bill, 40% could be refundable (up to $1,000).

To be eligible, you must:

• Be enrolled at least half time during one academic period that began in the tax year
• Be pursuing a degree or recognized credential from a qualifying post-secondary educational institution
• Not have claimed this tax credit (or the former Hope Credit) for more than four tax years
• Not have a felony drug conviction when the tax year ended

How to Claim Your Tax Refund

If you're expecting a tax refund, you can claim it in one of the following ways:

• Request direct deposit: When filing your tax return, you can request that your refund be deposited directly into your bank account. If you file electronically and enroll in direct deposit, you'll likely have your money within 21 days.
• Opt for a check in the mail: You can also request a paper check instead of direct deposit, but prepare to wait. It could take six weeks or longer to process your refund via paper check, according to the IRS.
• Apply it to next year's tax bill: This might make sense if you're self-employed and pay quarterly estimated taxes. Setting that money aside could give you a headstart on what you owe the following tax year.

Where's My Tax Refund?

You can track your refund using the IRS' Where's My Refund? tool or by downloading the IRS2Go mobile app. Neither will expedite your refund, but they can clarify the status. Most states also allow you to track your refund. You can check your state's department of revenue website for more information.

You can expect delays if your tax return is incomplete, incorrect or includes a claim for an earned income tax credit or additional child tax credit. Your refund may also take longer to process if you've been the victim of tax identity theft.

Learn more: Still Waiting on Your Tax Refund? Here's What to Do

How to Use Your Tax Refund Money

Using this money wisely can help you achieve your financial goals. Here are some potential ways to spend your tax refund:

• Pay down debt. Prioritizing high-interest debt can help you save money in the long run and get debt-free faster.
• Build your emergency fund. A strong emergency fund is a key part of financial wellness. Your tax refund can boost your savings and provide a safety net that you can draw on as needed.
• Save for retirement. Another option is to funnel your tax refund into an individual retirement account (IRA) or workplace 401(k). That can help grow your nest egg in a tax-efficient way. Just be aware that annual contribution limits apply.
• Invest in yourself. That might look like starting a business, going back to school or pursuing something else that could strengthen your financial future.

If you can't wait to receive your refund, some tax preparation companies allow you to borrow against it without paying interest or fees. Just be sure to read the fine print beforehand.

Learn more: What to Do With Your Tax Refund

Frequently Asked Questions

The Bottom Line

A tax refund is essentially a cash payout—and who doesn't like that? If your refund isn't as big as you'd hoped, a tax advisor could help you maximize your deductions and minimize your tax liability going forward. One other thing worth noting: A large tax refund may be a sign that you're giving too much money to the government throughout the year. You may choose to adjust your withholding or estimated tax payments to keep more of your money as you go.