Taking the 'fun' out of refunds

April 30, 2024 9:32 AM

Taxpayers have scads of wrong ideas about taxes — and they have even more wacky notions about tax refunds. Maybe they're just so tickled about getting what seems like cash from heaven that they choose to misunderstand elemental facts about our tax system.

It usually falls to the IRS and tax pros to bear the bad news and set them straight until the money arrives. In the meantime, what are clients likely to be thinking? From the Internal Revenue Service and tax preparers, here's a rundown of some of their biggest misconceptions about refunds.

Bigger is better

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After reminding them that they want to have the smallest refund possible, you'll also have to give a lesson in the concept of an interest-free loan.

"Getting a large refund usually means your planning was bad," said Morris Armstrong, an Enrolled Agent and registered investment advisor at Armstrong Financial Strategies in Cheshire, Connecticut. "You probably could have used the money each month for household, credit card payments, or savings. There's also the flip side: 'Is that all?' You did an excellent job of planning and had the use of your money throughout the year. Ignore your neighbors who brag about their huge refunds."

Filing early will get me my refund faster

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Not if filing early is the same as "rushing" a return. Hurrying can compound the chances of mistakes, not to mention that some tax forms arrive well into the filing season.

Who ya gonna call?

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Some think that calling the IRS, a tax software provider or their tax pro will provide a more accurate date for the federal refund.

Tell your clients that the best way to check the status of a federal refund, unless they're fond of hours on hold, is Where's My Refund? or the IRS2Go app — both are updated daily — though they can also phone the automated IRS refund hotline at (800) 829-1954. This hotline has the same information about current tax year refunds as Where's My Refund?; no need for them to call the IRS unless Where's My Refund? says to do so. Also let them know that requesting a tax transcript won't tell them where their refund is.

State refunds are taxable

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"One misconception is that the state tax refund may be taxable on the next year's federal return, even if it was applied to the next year's estimated tax or it was applied to past state tax assessments," said Mary Kay Foss, a CPA in Carlsbad, California.

Everyone's refund is late

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The IRS has long said it issues most refunds inside 21 days; states can be a little faster or a little slower. Federal returns can get hung up, especially early in the season, by claims for the Earned Income Tax Credit or the Additional Child Tax Credit.

Wrong or incomplete returns can produce late refunds (remind them yet again that the IRS usually uses snail mail — not phone, email or text — to contact a taxpayer about such matters as more information needed to complete a return). Banks can also take time to post a direct deposit. Mailed checks can come even slower. And one more thing: Reasonably on-time refunds do not come with interest.

My refund was less than I expected

Many things can whittle a refund. Again, the IRS will mail a letter of explanation (usually quickly) if it adjusts a refund. Tell clients they might also get a letter from the Department of Treasury's Bureau of the Fiscal Service if their refund was reduced "to offset some other financial obligations."

'I got a refund, so I don't have change my withholding'

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Maybe. Maybe not, so tell them to doublecheck (try the IRS Withholding Estimator). Remind them that withholding takes place yearlong. Also, the government does not know how much to take out.

"They have an idea," Armstrong said, "but withholding tables are universal and your return is individual and often they don't jive."