10 Things to Know About Tax Refunds

As you file your 2022 income tax return, you may find that the government owes you money. As of March 2023, the IRS reported that it issued nearly 42 million refunds on 2022 returns averaging $3,028. Here’s what you should know about tax refunds.

1. Refunds usually are only a return of your overpayment

Some taxpayers look forward to receiving a lump-sum refund that they use for vacation or other big ticket purchases. If you are getting a refund because you had too much withheld from your paycheck or overpaid your estimated taxes, don’t celebrate too much. You’re merely getting your own money back…without interest. The government does not pay interest on a tax refund unless the refund is paid more than 45 days after the due date of the return, or if you file after the due date, 45 days after you’ve filed your return.

2. Refunds from refundable credits must be requested

If you qualify for the earned income tax credit, you may be eligible for a tax refund greater than your tax bill. However, the only way to obtain it is to file a tax return, even if your income is below the filing threshold that would otherwise require you to file a return. The IRS won’t reach out to you and tell you to file a return so you can claim the refundable amount.

Other refundable credits are:

• Additional child tax credit
• 40% of the American opportunity credit
• Premium tax credit

3. Refunds suggest adjusting tax payments for this year

If you have a large refund on your 2022 return and don’t want to wait until you file your 2023 return in 2024 to again recoup your overpayment, consider adjusting your 2023 tax payments:

• Reduce your wage withholding. You can do this by increasing withholding allowances so less taxes will be taken from your paycheck. Alternatively, you can instruct your employer about a specific withholding amount that you’d prefer in order to achieve the proper withholding for the year.
• Reduce estimated taxes. If you pay these taxes, you can reduce your quarterly payments to better match your payments with your tax liability for the year.

4. Refunds can generate future tax savings or investment income

You can receive a check for your refund, have it deposited in your checking or savings account, or apply some or all of it toward 2023 taxes. Or, you can direct the IRS to send your federal tax refund to an account rather than to you. These include:

• IRAs and Roth IRAs
• Health Savings Accounts or Archer Medical Savings Accounts
• Coverdell Education Savings Accounts
• U.S. Treasury account for Series I bonds (only up to $5,000).

You can split your refund by completing Form 8888, recouping some of it while applying the balance to one or more of the above types of accounts. If you want the refund to be applied as a contribution for 2022, be sure to file early and instruct the account trustee or custodian of this application. For example, if you want to use your refund to make a tax deductible IRA contribution for 2022, be sure that the return is filed early enough for the refund to be received by the IRA custodian before April 18, 2023. Otherwise, the custodian will apply it for 2023.

5. Direct deposit is the fastest way to get a refund

It usually takes less than 3 weeks for refunds to be issued with respect to e-filed returns or 6 to 8 weeks for paper returns. Likewise, refunds can be received faster if direct deposit is requested rather than waiting for a paper check from the U.S. Treasury.

6. Refunds from amended returns can be direct deposited

The IRS says about 3 million amended returns are filed each year. If you file an amended return—Form 1040-X—electronically, you can request the refund be deposited directly to your account. This is a new development; previously amended returns—e-filed or on paper—had to have refunds mailed to taxpayers. Unfortunately, the IRS advises that processing an amended return remains a manual process, even if filed electronically; but electronic filing will cut out the mail time and provide a secure and convenient way to receive a refund.

7. You can monitor your refund online

If you’re waiting for a tax refund from your 2022 return, you can check its status using the Where’s My Refund? tool. There is a similar tool to monitor a refund from an amended return using the Where’s My Amended Return? tool.

8. Refund claims must be timely filed

There is a time limit for making a refund claim on Form 1040-X:

• 3 years from the date the original tax return is filed
• 2 years from the date the tax is paid if this is later than 3 years
• 7 years in the case of refund resulting from a write-off for a bad debt or a worthless security

There may be more time if the statute of limitations for making a refund claim is suspended for an individual with a financial disability. And the deadline may be extended for individuals impacted by a federally-declared disaster.

9. The IRS can apply refunds to certain debts

Even if you’re expecting a tax refund, you may not receive it. If you owe certain debts, under the Treasury Offset Program (TOP) the federal government can apply your tax refund toward them. Such debts include:

• Past-due federal taxes
• State unemployment compensation debts
• Child support
• Student loans

10. You can contest a denial of a refund claim

If the IRS won’t issue a refund, you can file a complaint against the U.S. in a federal district court or the U.S. Court of Federal Claims. But this can be done only after exhausting administrative remedies by appealing at the IRS level.

Conclusion

Refunds may seem like a gift from the government, but it’s more complicated than that. Think about refunds and what you need to do going forward.

Sources: IR-2023-22