The biggest tax question on most people’s minds as filing season gets underway is whether they’ll get a refund or owe the IRS money. If you owe taxes, you have until the April 15 filing deadline to pay the bill. If you’re due a refund, you should receive it in about three weeks after the return is accepted if you e-file.
The IRS started accepting tax returns on Jan. 27. “The IRS encourages everyone to consider filing electronically and choosing direct deposit,” IRS Commissioner Chuck Rettig says on the IRS website. “It’s fast, accurate and the best way to get your refund as quickly as possible.”
If you claim the Earned Income Tax Credit or the Additional Child Tax Credit, your refund could be delayed. The IRS holds refunds for filers claiming these credits until at least Feb. 15.
You can check on the status of your return at the IRS website.
The average tax return
As of Dec. 27, 2019, the IRS had received 155.8 million tax returns for the 2018 tax year and of those, 138.2 million were filed electronically. Of e-filed returns, tax professionals prepared 80.6 million of them; the remaining 57.6 million were self-prepared.
There were about 111.8 million refunds issued totaling $320.1 billion, with the average refund being $2,869, a 1.4 percent drop from $2,910 the previous year. Of the refunds, more than 92 million were direct-deposited, which is a 2.1 percent increase from the previous year when slightly more than 90 million refunds were direct-deposited.
How tax refunds work
As a U.S. resident, you must pay a portion of all your earnings to the federal government to meet your tax obligation. Your employer is responsible for collecting taxes from every paycheck and paying the IRS on your behalf.
How much you pay in federal withholding depends on your earnings and how you fill out IRS Form W-4, which goes to your employer and includes your filing status and number of dependents. The more dependents you claim, the more money you get to keep each pay period.
In addition, taxes for Social Security and Medicare are withheld from your check. These are called FICA (Federal Insurance Contributions Act) taxes. In 2019, the FICA tax rate was 7.65 percent: 6.2 percent for Social Security (listed as OASDI on your pay stub) and 1.45 percent for Medicare.
There is a wage ceiling for Social Security taxes. For 2019, it was $132,900. Gross income above that threshold is exempt. For 2020, the wage base rises to $137,700.
When it’s time to file your taxes, you tally all your earnings, deductions and any tax credits you might have to see what your true tax obligation is for the year. If you had too much money withheld from your pay, the IRS owes you a refund. If too little was deducted from your pay, you will owe the IRS the difference.
Lower tax refunds can be a good thing
It’s nice to see a tax refund show up in your bank account, especially if it’s a sizable one. But a big refund means you are giving the IRS more money during the year than you have to. And when the IRS sends you a refund, it doesn’t come with interest.
On the other hand, if you owe the IRS at tax time, it means you’re not having enough taxes withheld from your pay throughout the year. While it may be nice to have the extra money every pay period, you’ll have to write a check to the IRS after paying employment taxes all year.
Ideally, you want your tax bill to come out to $0, or very close to it. If you’re paying the IRS too little or too much throughout the year, adjust your W-4. Use the IRS tax withholding estimator to figure out how many exemptions to claim.