Tax season may be stressful. However, many taxpayers see a light at the end of the tunnel in the form of a tax refund. Indeed, many people rely on their annual tax refund, using it for everything from retirement savings to investing with a financial advisor. If you’ve ever had significant questions about how tax refunds work, we’ll explain what you might not know.

The word “tax refund” refers to a reimbursement given to a taxpayer for any excess taxes paid to the federal or state government. While taxpayers generally regard a return as a windfall or a stroke of luck, it is frequently the result of an interest-free loan given to the government. It’s often easy to avoid overpaying your taxes, allowing you to keep more money in your pocket with each paycheck—and avoiding a refund when you submit your return.

It can be exciting to get a large tax refund. You can expect to get a refund if you overpaid your taxes during the year. This generally happens when taxes are deducted from your paycheck every time you get paid by your employer.

Here are some reasons why a taxpayer might get a refund:

• The taxpayer made an error in filling out Form W-4, used to estimate the correct amount of withholding from the employee’s paycheck.
• The taxpayer intentionally fills out their W-4 to have a higher withholding and larger tax refund at tax time.
• The taxpayer forgot to update their W-4 to reflect a change of circumstances, such as the birth of a child and an additional child tax credit (CTC).
• A freelancer or self-employed person who files quarterly estimated taxes may overpay to avoid a surprise tax bill or underpayment penalties at tax time.
• The taxpayer is eligible for refundable tax credits, which can reduce the amount of taxes owed below $0. In other words, if the credit is larger than your tax bill, you will receive a refund for the difference.

Tax refunds are the opposite of a tax bill, which refers to taxes owed by a taxpayer. In the case of a tax bill, you owe more taxes to the government than you paid during the year. You normally have a tax bill if your employer doesn’t withhold enough taxes from your paycheck.

Taxpayers are generally better off not overpaying their taxes in the first place because that money could be put to better use. For example, you could adjust your withholding (or estimated quarterly taxes, if you’re self-employed) and invest that extra money in your individual retirement account (IRA), 401(k), or even an interest-yielding savings account. That way, the money is working for you instead of for the federal government.

Refunds From Tax Credits

Most tax credits are nonrefundable, meaning that the tax credit can only reduce a taxpayer’s liability to $0. Any remaining amount from a nonrefundable tax credit is automatically forfeited by the taxpayer. For this reason, this type of tax credit is sometimes called a waste tax credit.

In contrast, a refundable tax credit pays out in full, meaning that a taxpayer is entitled to the entire amount of the credit regardless of their income or tax liability. If the tax credit reduces the tax liability to below $0, then the taxpayer gets a refund.

Refundable tax credits include:

• Child tax credits: For 2023 and 2024, the child tax credit is worth a maximum of $2,000 per dependent. It was higher in 2021, but that was a one-year bump due to the COVID-19 pandemic. Up to $1,600 in 2023, and $1,700 in 2024, of this is refundable at a dollar-for-dollar rate.
• Earned income tax credit: Taxpayers who earn low-to-moderate income may qualify for the Earned Income Tax Credit (EITC or EIC), which reduces the tax amount that you owe and could entitle you to a refund.
• American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC) helps taxpayers offset higher education costs paid on behalf of eligible students. The annual credit is worth $2,500 per student. If the credit drops your tax liability to zero, the IRS will refund up to 40% of any remaining amount of the credit (up to $1,000).
• Premium tax credit: Low to moderate-income households could qualify for a premium tax credit (PTC) which lowers the overall cost of available health insurance. These health plans must be selected from those offered through federal or state exchanges. If you use less than what you qualify for then you could receive the balance in a refund.

The Tax Refund Process

You can request a tax refund from the government by filing an annual tax return. This document reports how much money you earn, expenses, and other important tax information. It will help you to calculate how many taxes you owe, schedule tax payments, and request a refund when you have overpaid.

Once the government gets your tax return and processes your information, it officially approves you for a refund before sending off your money. Tax refund processing varies depending on the way that you file your taxes.

Refunds for tax returns filed electronically are generally sent out less than 21 days after the IRS receives your information, though they can take up to 12 weeks to show up. Refunds for tax returns filed on paper often arrive between six and eight weeks. You could be wondering, “Why does my tax refund take so long to show up?”

Delays can happen as a result of mistakes, budget cuts and overwhelmed tax preparers. The timelines that the IRS provides are only estimates, so it’s probably not a good idea to count on using a refund to make an important payment or purchase. In some cases, you might be tempted to take out a refund anticipation loan. Sure, you’ll get your money earlier. But as a consequence, you may have to pay a hefty fee and interest.

Claiming Your Tax Refund

There’s actually more than one way to receive your tax refund. You can request that the government send you a paper check in the mail. Or you can decide to go for a direct deposit tax refund and have your money put into three different places, including savings and a retirement account.

Ready to get in on the investing game? You also have the option of using your tax refund to buy $5,000 or less in Series I savings bonds.

Whatever you decide to do with it, you have three years to claim your refund from the initial filing deadline. That’s good news if you miss the April due date or you still haven’t filed your taxes from three years ago. If you were granted an extension, you’ll have three years from the extended deadline to ask for a refund check. The deadline for filing 2023 tax returns is April 15, 2024.

Read Also: What is the Tax Rate for an Estate?

Unfortunately, you don’t always get to keep your entire refund. Sometimes, the IRS makes a mistake and sends you more money than you were meant to have. Anyone who owes child support or has overdue student loan bills may have some of their refund taken and applied to those debts. Word of advice: If your refund check seems larger than it should be, you might want to wait before you head out on a shopping spree.

You could also receive a smaller refund check than expected as well. That proved to be somewhat common in the 2019 tax filing season, following the passage of President Trump’s Tax Cuts and Jobs Act, which changed the tax code.

Tax refunds usually are issued either as checks and sent by U.S. mail or as direct deposits to the taxpayer’s bank account. Alternatively, taxpayers can use the refund to buy U.S. Series I Savings Bonds or have it loaded on a prepaid debit card. The fastest way to get a refund is to e-file your tax return and choose direct deposit.

Most refunds are issued within a few weeks of when the taxpayer files their tax return. However, there may be some instances where a refund takes longer.

For example, taxpayers who claim the EITC won’t receive their refunds before March. That’s because the law requires the IRS to hold on to these refunds until March due to years of fraudulent filings for the credit.

Refunds are always pleasant, but it would be better to avoid overpaying in the first place by correctly filling out your W-4 or precisely calculating your estimated taxes. The closer you get your refund to zero, the more money you will have throughout the prior year.

Of course, not everyone agrees. Some people consider tax refunds an alternative savings plan and look forward to the lump-sum repayment.

How to Write a Letter to Request a Refund of Excess Payment?

Most businesses have refund policies that allow customers to obtain a refund within a certain time frame. However, these days, the majority of us rely on e-commerce platforms such as Amazon and eBay. When making an online purchase, the request process may be more complicated. Even if you visit a physical store and request a return, the store may refuse to honor its refund policy.

If you find yourself in one of these circumstances, try contacting the seller and requesting a refund. This article explains how to draft a refund request letter, what to include in the letter, and provides a sample refund request letter.

Unsure of when to send a refund request letter? Here are some common reasons we have seen: 

• A business billed for an item you never received.
• You received an item that was damaged or defective. 
• The item the business sent you was not what you ordered.
• The service or product the business provided was not satisfactory.
• You paid a contractor or mechanic for work they never did. 
• The auto repair shop improperly repaired your car.  

Why is a Refund Request Letter Important?

A refund request letter is a written request for the return of payment for products or services. A well-crafted refund request letter can be a useful tool if you are having problems with a business. For example, if the business refuses to honor its refund policy even though they have delivered a damaged product you can send them a refund request letter. 

Here are some reasons to first send a refund request letter to a business before taking legal action:  

1. Depending on the state you are filing a lawsuit in, you may be required to demand payment from the business before filing. For example, in California, small claims court demanding payment is a requirement. Some small claims courts want to see that you reached out to the business before filing a lawsuit. The easiest way to do this is by sending a refund request letter. 
2. A refund request letter signals to the business that you are serious about getting your money back and you are willing to take action. 
3. Sending a written refund request letter assures you there is a record of your attempt to seek payment. So while requests for refunds can be made orally, we recommend making any offers in writing. Writing a letter can sometimes be very effective as it is a more formal way of making a request. 
4. The most important reason to send a refund request letter is that it may lead to you getting your money back quickly and efficiently!  

Many of our clients ask us if their letter requesting a refund needs to be written by an attorney. There is no formal requirement that states you need an attorney to write your refund request letter, you can do it on your own. Further, it may be hard to find an attorney to write a refund request letter for you because an attorney may not be willing to take on a case that might settle easily. Ultimately, the decision to hire an attorney or not is up to you. 

What to Include in Your Refund Request Letter

Unsure of what to include in your letter? Below we have included suggestions on the most important things to include in your refund request letter. Always make sure the letter is addressed to the business that sold you a product or provided a service. For the most part, the letter should include basic details about the transaction, the reason why the refund is sought, and expectations for repayment.

Here are a few suggestions of what to include in your refund request letter:

• Include details about the transaction. For example, if you paid for services not rendered and are now asking for a refund make sure to include an invoice from the business for the services.   
• Explain why you are seeking a refund, but make sure that your reason falls within the refund policy. For example, was the product defective and if so does the business’s refund policy allow refunds for defective products? 
• Include your contact information so that the business can reach you in case they would like to accept your refund request. The best way to communicate with a business is in writing, include an email address along with any other form of communication you are comfortable with. 
• Include where you would like to receive payment. If you paid for the product or service with a credit card consider asking the business to refund the balance to the credit card you used to make the initial transaction. 
• Attach other documents that may be necessary and could be used as evidence later in case of legal action. For example, a receipt for the item or an invoice from the business for services rendered. 
• Include a deadline to respond to you. You may want to consider giving the business 14 days to respond to you and state that if they do not respond within that time, you intend to sue them. 

Once you have sent a refund request letter, keep it in your records. In the event, you do end up filing a small claims lawsuit you can bring it to the hearing and show it to the judge. This is especially handy if the business states they didn’t receive the letter.

How to Send a Refund Request Letter

We recommend sending your refund request letter in a way that ensures that it was delivered. This way, you know that the other party received your letter. If you later need to escalate to court, you can provide this evidence to the judge.

• Sending the letter via email: if you send the letter via email, you will want to use software that tells you whether the other party received your email and opened it. With our letter-writing tool, you can track whether your email was delivered and opened. 
• Sending the letter by mail: you will want to obtain tracking information for your letter to have proof of delivery. In my experience, it tends to be difficult to obtain signature confirmation at delivery as many individuals will avoid signing for mail or they will sign illegibly. However, many times a letter tends to be presumed delivered as long as the letter was mailed to a known address and tracking states that it was delivered. Pro Tip: I have also learned that USPS tends to not be the most reliable at providing tracking information as they fail to finish scanning the letters at delivery. You will want to be prepared to use FedEx or send multiple letters via USPS. With our letter-writing tool, you can mail your letter and obtain tracking.

If I were sending a refund request letter, I would email and mail the letter. Mailing the letter is a more formal approach and you may be taken more seriously.

If you sent a business a refund request letter and do not receive a response, you may want to consider suing them in small claims court.  Small claims courts handle a variety of cases at a low cost. This is because small claims courts were intended to be affordable and user-friendly. In some small claims courts, attorneys are not even allowed to represent you! Consider filing a small claims lawsuit if a business refuses to provide you with a refund.