Who gets refunds from IRS?

The IRS issues refunds for one of two reasons:

  1. You paid in more taxes than you owed and/or
  2. You are getting a refundable tax credit1.

The refundable tax credits for 1040 filers are:

  1. Earned Income Tax Credit
  2. Additional Child Tax Credit (partial), and
  3. American Opportunity Credit (college tuition credit, partially refundable).

The determination of the federal income tax you must pay is accomplished by filing an annual income tax return. Most Americans pay in estimates of their taxes owed through mandatory income tax withholding at work. Other common ways taxpayers prepay their annual tax bill is through quarterly estimated tax payments, or withholding on other income such as Social Security, pensions, IRAs, etc. Non-refundable tax credits such as the foreign tax credit, child care credit, and part of items b. and c. above, reduce the amount of taxes owed.

In addition to the refundable credits above, taxpayers may receive a refund of taxes paid but not owed, such as excess Social Security tax on more than one job, certain federal fuel taxes, and excess Additional Medicare Tax.

That’s it. If you have sufficient taxable income you’ll owe taxes. Most people prepay those taxes through withholding or tax credits, and get a refund. With the tax law changes instituted in 2018, new tax tables were created. Many people were surprised when their refunds weren’t what they expected, or they had to pay more at tax time. Almost all of those were folks whose federal withholding at their job had gone down (and their paycheck got bigger), but they didn’t notice at the time. Beginning in 2020, a new withholding system is available for employees that more accurately reflects the new tax law.

In a perfect world, taxpayers would pay no more taxes in through estimated tax payments (including withholding) than the amount their taxes exceeded their refundable credits and taxes paid but not owed. However, many people like being over-withheld so they get a tax refund–it’s a little boost prior to the summer season. And with interest rates on savings as low as they are, letting the government use their money for free doesn’t seem to be a bad option.

1 You may also receive a payment of additional subsidy for health insurance premiums bought through the Marketplace by filing Form 8962, or the subsidy for HCTC-qualified health insurance by filing Form 8885, but these are not tax refunds or tax credits.