Have you submitted your Statement, and do you know that you will receive a refund from the IRS? See how to leverage this money to improve your financial situation.
Knowing that you will be entitled to a refund from the IRS is always good news and usually leads to plans being made to spend that money on vacations or a long-awaited purchase. However, and even because we live in a context of some uncertainty, it may be prudent to use the reimbursement to give more solidity to your personal finances.
In 2021, the IRS refund may be lower than in previous years, as the withholding tables – which determine how much is deducted monthly from your salary – have been progressively adjusted to more accurately reflect what should have actually been paid in tax.
That is, if last year you started to deduct less per month when you settle accounts with the Tax Authority (AT) this year, you may also receive less reimbursement or pay more IRS, depending on the case.
How does IRS reimbursement work?
To understand how the IRS refund works, it is first necessary to understand how the collection of this tax works.
Throughout the year, a percentage of your gross salary is withheld monthly. This IRS withholding rate is, in essence, an anticipation of what you should pay in tax for that year, depending on your income.
The withholding rates to be applied to each taxpayer are defined in the withholding tables, approved annually by the Government, and published. These rates take into account the number of dependents, whether or not you are married, and the type of income you receive (dependent work or pensions).
It turns out that, most of the time, these fees don’t exactly match what you should pay the IRS. Also, there may be other income, other than work, subject to a tax identification number. In addition, deductions for expenses such as health or education must also be deducted.
Therefore, only after all these accounts have been made can AT accurately determine your IRS. If you paid too much tax, then you will be entitled to a refund. But if what you deducted monthly was not enough to cover the tax due, you will have to pay IRS (insert a link to an article about paying IRS). This settling of accounts only occurs after submitting the income statement.
If you are entitled to a refund, AT will then return the money by bank transfer, provided you have included your IBAN in the declaration. If you did not provide your bank account number, a check would be sent to your tax residence.
3 Important Notes About IRS Refunds
The IRS refund must be made by August 31 of each year, but only in cases where the return was delivered within the deadline.
In principle, the sooner you submit your tax return, the sooner you will receive a refund. Still, AT is not obliged to be quick in this process, although in 2020, it took about 20 days to pay. In 2021, the deadline could be even shorter.
If the refund amount is less than 10 euros, the taxpayer is not reimbursed for that amount.
If you are entitled to reimbursement from the IRS, but there are debts to AT, the reimbursement will be used to pay the amounts owed. If the repayment amount exceeds the debt, the difference is returned to you.
How do I know if I have a refund?
When submitting the return, you can simulate the result of your IRS settlement and immediately know if you are entitled to a refund or if you will have to pay more tax. Afterward, and if you want to know when you will receive it, you can follow the process on the Finance Portal.
To do this, just authenticate with your NIF and password and then enter the IRS section, which is usually on the home page.
In this menu, choose the option Consult declaration and the year, which in this case is 2020. Click Search. You will then see the declaration data, which can have four states:
- Right Statement – which means that the Statement has been validated by the AT
- Processed Settlement – means that the accounts are made by the Tax Authorities
- Refund Issued – your refund will arrive shortly
- Payment confirmed – the refund has already been paid.
Five tips for using your IRS refund well
If you know you’re going to receive a refund from the IRS, consider using it to consolidate your financial situation, especially if you’ve recently had difficulty meeting your financial commitments.
This extra money can be used rationally and prudently in a context where economic recovery is not yet a given.
Here are some ways to use your IRS refund.
Preparing for the end of the moratorium
If you have adhered to bank moratoriums and have not yet resumed payment of your credit or credits, you can use the IRS refund to cushion this expense’s impact on your budget.
A few months have passed without paying part or all of the installment, but as that date approaches, your budget must be prepared for the return of that expense.
Saving the reimbursement to pay some installments or part of them would be a financially responsible option, thus giving your finances more leeway.
Pay IMI, IUC, or other obligations
If your refund arrived in time to pay the IMI or IUC, why not take advantage of it and use it to pay that expense or at least part of it?
This refund is, after all, extra money and, given the weight that these taxes have on your wallet, it can help you to pay them less. Take the opportunity to consult the 2021 tax calendar.
If you have other debts or late payments, this money can also be important to help you reorganize your financial life and stop having that worry.
Build a financial cushion
The pandemic has confirmed the importance of having a financial cushion or emergency fund, that is, money saved that can pay for a few months’ expenses if you lose income due to illness, unemployment, or other reasons.
Some experts say that this pillow should be enough for three months of expenses; others advise that it corresponds to half a year of your family budget. In fact, the most important thing is that it is done.
Reimbursement from the IRS can be the first step in creating this reserve fund or bolstering the existing one.
Even if the value is low, it will always be a contribution to those savings that can be very useful in the future.
Subscribe to a savings
Opening or boosting a savings account or subscribing to a PPR are other ways to use your IRS refund to improve your financial situation.
By saving, you are ensuring that you have a nest egg to use in case of need or unforeseen circumstances. Or, if you invest in a PPR, you will be protecting the future and preparing for a more peaceful retirement.
Currently, it is possible to open an account online, so you can receive the refund and immediately apply it to a savings account.
The traditional term deposit can be a good idea if you don’t need to mobilize that money within a certain period of time. As a result, you can even opt for a deposit with a longer-term (for example, five years), which will allow you to save some more money.
Talk to your manager and review the options available to apply for IRS money.
invest in training
Investing in education and training is always a good idea. If you want to improve a language or learn a new skill that could be useful to advance your career or to monetize a hobby, IRS reimbursement may be the funding you need.
If you have children, you can use this money to open an account that they can draw on when they go to college or pay for tuition fees or a summer course. Or you can save it to prepare for back to school and relieve your budget at that time.