Many taxpayers eagerly await the check they receive from the IRS each tax season – about 70 percent of Americans typically expect to receive one – though many have misconceptions about exactly where that money comes from.
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A recent survey from CreditKarma found that while people like getting a refund each year, nearly half of all respondents did not know the refund is a result of overpaying taxes to the federal government.
But for 44 percent of people, it is their biggest paycheck of the year.
That might be because when people overpay, it can be by a significant amount.
The average refund last tax season was about $2,725, as the IRS doled out about 95.7 million checks. It processed about 130.7 million returns as of April.
The ultimate goal of proper withholding is to pay so much each month that you neither owe nor are owed come April.
Proper withholding is important for another reason – taxpayers who underpay are at risk of facing a penalty. During any given year, taxpayers can avoid the underpayment penalty if they paid withholding and estimated tax of at least 90 percent of the amount owed.
Here are some of the misconceptions Americans had about tax refunds, according to the CreditKarma’s survey:
What is a tax refund?
While 46 percent of respondents knew that tax refund money comes from their own paychecks, an equal percentage of people thought the money was given to them by the government. Four percent said they did not know the origins of refund money.
What does it mean when you get one?
Forty percent of people knew that getting a tax refund means they overpaid income taxes.
About 11 percent of people knew it meant they were essentially giving the government an interest-free loan.
Only 7 percent of people knew that it meant they needed to adjust their withholdings.
Less than 30 percent of survey respondents identified all three of the above items as correct.
On the other hand, 13 percent of people didn’t know any of the aforementioned items were true.
What determines if you get a refund?
More than half of respondents – 51 percent – did not know they could determine whether they get a refund each year by adjusting their withholding amounts. A full 41 percent believed they had no control over their refund.
How much are Americans expecting?
Despite a general lack of knowledge about tax refunds, 46 percent of people were expecting to receive refund checks of $1,000 or more this year. More than half of respondents said they would actually rather get a tax refund when April rolls around than have more money in their paychecks consistently throughout the year. Only 34 percent of people said they would prefer to have proper withholding.