Beginner’s Guide to Tax RefundsReviewAdviceFAQ's

Beginner's Guide to Tax Refunds

The good news is, we are talking here about tax refunds, which invariably are a good thing to hear, especially if you currently are in financial straits and need any cash you can put your hands on. The math is simple: if during the previous year you paid more in federal income taxes than your fiscal liability, you get a nice refund check, the amount of which depends on your situation and tax filing status. If you paid less than you owe, you'd better settle that fiscal debt before April 15, lest the Internal Revenue Service charge you a rate that can go as high as 25%. To better understand tax refunds and how they work, you should know what to do before filing your tax return, things to take care of while waiting for the refund money, and what to do with the refund money after receiving it.

Before Filing Your Tax Return

Julie L., an experienced enrolled agent I've known for years, says that filing your tax return should require the same amount of diligence and preparation you apply to credit events, say, when applying for a mortgage. Three specific stages come into play here:

Do your homework and get your paperwork ready – and handy

Take out your master expense folder and list all costs by category. For example, distinguish things like medical costs from expenses as varied as groceries, mortgage interest and student loan bills. If, like me, you are more of an Excel aficionado, create a spreadsheet to track all expenses you incurred during the year. Julie L., my tax expert friend, says it's always best to sign up for the expense tracking feature that your bank or credit card company provides, and to download your annual expense report directly into Excel.

Beginner's Guide to Tax Refunds

Prepare the return

File your tax return online through tax software providers like TaxACT and H&R Block. If your situation requires fiscal savvy or if you are not adept at interpreting IRS stipulations, contact a specialist to help prepare your return. You can hire a certified public accountant, enrolled agent or fiscal accountant to review your paperwork and suggest the best ideas on things like deductions and tax credits.

File the return

After reviewing your information, file your return before April 15. Don't wait until the last day or minute because systems – be they online or in real life, think U.S. Postal Service waiting lines – typically are saturated on D-day and your return may be delayed and reach the IRS after the deadline. If you think you might not be ready by the deadline, go ahead and file an extension with the agency. However, remember that if you owe taxes, you would be required to settle that debt before April 15, otherwise penalties and late-payment charges apply. Don't forget to specify bank accounts to which federal and state tax authorities must transfer your refund. If needed, ask the IRS and your state's fiscal department to do a split refund, meaning you specify up to three U.S.-domiciled bank accounts to which authorities must send your money. Use Form 8888 (PDF), Allocation of Refund, to request that your refund be split.

While Waiting for the Refund Money

After filing your tax return, all you should do is wait. That's it. The waiting period generally ranges from 2 weeks to a few months, depending on your situation and filing status as well as a miscellany of events ranging from money you owe to your state's tax department to open items under your name and social security number. The IRS provides a portal you can use to check your refund status. Specifically, the agency says:

  • You can check your refund status one day after e-filing your return, making sure it is received and acknowledged by the agency – an assurance that typically is provided by the tax-filing portal. If you file a paper return, you must wait at least four weeks before enquiring about your refund money.
  • You must have your social security number, filing status, and the exact refund amount to check your refund's status.
  • You must input all the above required data into the government's secure and easy-to-use Refund Status portal.

After Receiving the Refund

Needless to say, it is always a pleasure to open your mail and see that shiny IRS check, or to verify your bank account online and see a happy uptick in the daily balance. But after the understandable, initial emotional outburst that comes from knowing that you now have more money in your pocket, you should think about the best way to spend or allocate that cash so that you feel not only happy about it but also can promote your own financial and retirement objectives.

Pay off your mortgage

Use your refund to partially pay off your mortgage – or entirely settle the debt if you receive a sizable refund and your mortgage is near maturity. This technique is economically smart and can save you money, especially if you currently are coping with a high fixed-rate mortgage or an adjustable-rate mortgage whose terms and conditions don't veer in a direction that is favorable to you.

Help a friend

Be generous; dole out part of your refund to help out a friend or family member. Why not help, say, Aunt Mattie to finally buy that plasma TV she's sought for so many months, or bring David, your best friend's son, to Disneyland, even if it were for only two or three days? You get it – the idea here is to be financially bighearted and help out someone in need.

Give to charity

The same concept of "sharing the little wealth" that came your way through your tax refund applies here, too. Write a check, be it for $5, $10 or $25, to your favorite charity. Some people, especially those with a religious bent, would say that 10% is a good threshold to target when donating to your preferred philanthropic organization. But I would not go so far as to suggest a specific benchmark. Give as much as your heart directs you to.

Pay off credit cards

Use part, if not a substantial portion, of your refund to reduce your outstanding credit card balances. Call all your card companies and ask them to confirm the amount you owe, the annual percentage rate (APR) each company is charging, and each card's terms and conditions. Then, list the balances owed by descending order, meaning from the highest balance to the lowest. Do the same thing for the APRs. Next, figure out which card's balance you should first pay off. Personal-finance gurus invariably recommend that you first settle the card with the highest amount, so that you can slash the interest amount you fork over every month.

Pay off personal loans

Use the same logic you applied to credit cards here. Unlike a credit card balance, a personal loan is not revolving credit, has fixed payments and matures within a specific period – say, 4 years or 60 months. If you don't have that much credit card debt, use your fiscal bounty to pay off personal loans.

Increase your 401(k)

I strongly recommend that you allocate part of your refund money to your 401(k) because retirement planning should be part of your overall financial goals. Contributing cash on a tax-deferred basis, while adhering to sound investment principles, can help you reach financial freedom sooner than you could think. Talk to your company's human resources department or plan administrator to see how you can increase your 401(k) – or other retirement accounts, for that matter.

Go back to school or take a professional course

In a modern-day economy in which skill improvement is a necessity both for companies and employees, it is important that you keep up with what's happening in your industry and profession. Most employers provide in-house training for their personnel, but if your topic of interest is not part of the company's curriculum, you might as well seek that education from external parties. Contact your local university or professional training center and ask a representative about terms and conditions for enrolling in a continuing-education program. Also, check online for portals that offer e-training sessions, which often are cheaper than face-to-face academic interaction. The third thing you can do is to call your state or municipality's employment office and request a list of workshops and training sessions available for someone with your skill set and professional background.

Indulge, Indulge, and Indulge – Reasonably

Indulge your urge to splurge. Make yourself happy; spend on things that you so love – within limits, of course. Take that long-awaited trip to Tahiti and enjoy it as much as you can. It is your money after all, and you certainly deserve a little personal pampering as well as a nice break from the daily routine.

Boost Your Rainy-Day Fund

If possible, you should assign part of the refund cash to your rainy-day fund – which is emergency, last-resort money that finance people say should cover your basic expenses for at least six to 12 months or, even better, 18 months. If you don't have an emergency fund yet, create one by contacting your bank and opening any account with a savings perspective – be it a money market account, certificate of deposit or savings account.

What to Do if Your Tax Refund Is Stolen

If an identity thief has cashed your refund check, contact the IRS Identity Protection Specialized Unit and complete an IRS Identity Theft Affidavit, Form 14039. The direct phone number is 800-908-4490. Be warned that the agency would ask for some documentation to ascertain your identity, including your previous tax returns, W-2s and photo ID. The investigation typically takes up to 180 days to complete, but taxpayers who have their cases open for years are not uncommon.


Using your tax refunds wisely can help you reach economic stability quickly and give you the peace of mind that comes with debt freedom. There are many ways you can allocate the refund money, such as boosting your nest egg or 401(k) account, helping people and animals in need, and quenching your crave for shopping.

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