What is a Tax Refund? A Simple Explanation for Teens and Beginners

What is a tax refund? A tax refund is money that a taxpayer gets back from the government if they paid more income tax than they owed. For example, if you were supposed to pay $10,000 in income tax, but paid $11,000, then you would get back the extra $1,000 as a tax refund. Tax refunds are usually issued within three weeks of filing your electronic tax return, and can be deposited directly into your checking account or received as a paper check. Why would I pay more tax than I have to?

There are many reasons why you might end up paying extra tax. Your employer might have withheld more tax from your paychecks than needed based on your W4 form. If you are self-employed, you might have overestimated your quarterly taxes and therefore paid extra tax. There is also a possibility that you were eligible for refundable tax credits – like child tax credit or education tax credit. If the credit is more than the tax you owe, you will receive a tax refund.

Is it good to get a tax refund? A tax refund certainly feels exciting! In fact, many people think of tax refunds as free money – but that is far from the truth. When you get a tax refund, it means you essentially gave the government an interest free loan! The government got to use your money for free, and is simply returning what was yours to begin with!

So it is better to not overpay taxes in the first place than it is to get a tax refund. However, if you put the refund money to good use, a tax refund isn’t such a bad thing. What should I do with the tax refund money? Many people spend the refund money recklessly. A better use for it would be to lower your debt by paying off at least a portion of your outstanding loans like student loans or credit card debt.

You can also use it to build or boost your emergency fund. Yet another good option is to invest the tax refund money.

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