Tax refunds are a fantastic opportunity to take advantage of an additional lump sum of money to help pay off debt, put toward a special occasion, add to your savings account, or to buy every day household items. No matter how you see your tax refund being the most useful for you, the first step is to claim your refund. Surprisingly, many people do not file their tax refund despite being owed money by the Internal Revenue Service (IRS). Currently, the IRS has approximately $917 million in unclaimed tax refunds. However, if someone files their taxes, but does not claim their refund, they can do so up to three years after filing.
One is only eligible for a tax refund if they paid more taxes than they owed in that tax year. So, not everyone receives a tax refund annually. However, receiving a refundable tax credit can also make one eligible for a tax refund.
Some important terms to know when filing your taxes and determining if you are eligible for a tax refund are:
- Credit: A tax credit is put toward the amount of income tax you are responsible for, which reduces the total tax amount owed to the IRS.
- Deduction: Reduces amount of income that is taxed
- EITC: Earned Income Tax Credit; the EITC is a tax credit for working people with low to moderate income. **EITC is a refundable tax credit.
- Income Exclusion: Certain types of income are counted as nontaxable under the income exclusion rule. Examples: Life insurance death benefit proceeds, child support, welfare and municipal bond income. **Income that is excluded is not reported anywhere on Form 1040.
- Refundable Tax Credit: A type of credit that is treated as a payment; tax payer can receive payment as a part of tax refund from IRS if taxes owed are less than refund total including tax credit.
- VITA: Volunteer Income Tax Assistance; provides free tax preparation for low-income, disabled, and elderly members in various U.S. communities
- W2: Tax form created by employers for each employee that details earnings and government withholdings for a given tax year. **IRS tax rules require employers to distribute W-2 forms by the end of January for the previous tax year.
- Form 1040: Form 1040, U.S. Individual Income Tax Return, is one of three forms – 1040 (the “Long Form”), 1040A (the “Short Form”), and 1040EZ (the “Easy Form”) – used for personal federal income tax returns filed with the IRS.
- Form 1099: A statement sent to the IRS and taxpayers by the payers of dividends and interest and by issuers of taxable original issue discount securities.
- Form 1095: Health Insurance Marketplace Statement (new in 2014)
What you will need to successfully file your taxes:
- W-2’s and/or 1099-R’s from ALL employers for previous year
- Interest and dividend statements from banks (Forms 1099)
- Form 1095—Health Insurance Marketplace Statement (new in 2014)
- Social Security cards for ALL family members. *Or, you may bring a Social Security number verification letter issued by the Social Security Administration.
- Proof of childcare expenses
- Copy of 2015 income tax return (if available)
- Valid picture ID for taxpayer and spouse
- Copy of check for direct deposit of refund
- Any questions you may have about the preparation process
Services available to assist with the tax filing process:
- My Free Taxes: www.myfreetaxes.com
- IRS- Treasury: Free Tax Prep: www.IRS.treasury.gov/freetaxprep
- UMSL VITA Site: http://www.umsl.edu/~vita/services.htm#bring
- Gateway EITC: www.gatewayeitc.org
- St. Louis Tax Assistance Program (TAP): www.stlouistap.org
**Check sites to see which types of tax documents servicers are trained to prepare.
Now that you are armed with the tools and knowledge to successfully file and maximize your tax refund, make sure that you are aware of the potential for predatory tax filing services that are looking to make money from you. Additionally, the IRS conveniently offers the opportunity to receive your refund as a direct deposit into your checking or savings account in addition to more traditional options.
Finally, if you do qualify for a tax refund this tax season (January-April 15, 2016), make sure you use your refund wisely! Some ideas for ways to use your refund are:
- Shared deposit loan
- Pay off old debt
- Open a holiday or special goal account
- Save for a down payment
- Take a class or employment training
- Treat yourself, then treat yourself (i.e., save before you spend)
- Make saving a game with yourself
By Anna deRuyter, Prosperity Connection Practicum Student