What is a tax refund?

Imagine you are at the grocery store and have ten crips, new one-dollar bills in your hand.

(Ok, I know this already too hard to believe, because who carries cash anymore, but stay with me…)

You find a candy bar you want to buy.

You go through the self-checkout, and it says you need to pay $1.79 for the candy bar.

So you put two of those crisp, new dollar bills into the machine.

Two dimes and a penny drop into the change cup.

You take the change and candy bar and leave the store.

The next day, you go back to the store. This time you need a loaf of bread. Again, you brought ten crisp, new dollar bills.

You go through the self-checkout, and it says you need to pay $3.29 for the loaf of bread.

So you put four of those crisp, new dollar bills into the machine.

Two quarters, two dimes, and a penny drop into the change cup.

Ok, one more.

The following day, you go back to the store. This time you need a pint of ice cream. Again, you brought ten crisp, new dollar bills.

You spot a coupon stuck to the pint of ice cream that says “$1 off!”

You go through the self-checkout, and it says you need to pay $5.49 for the pint of ice cream.

First, you scan the “$1 off!” coupon. Now you owe $4.49, so you put five of those crisp, new dollar bills into the machine.

Two quarters and a penny drop into the change cup.

If you’ve made it this far and understand what’s happening, then you understand how tax refunds work.

First, you find out how much the bill is. That is your tax liability.

Then we see if there are any coupons. We call those tax credits.

Then we see how much you paid in. This comes in two forms: first, amounts taken out of your paychecks, called tax withholding, and second, amounts you pay in throughout the year, or estimated payments.

If your credits, withholding, and estimated payments wind up more than your liability, you get a refund (like change back at the store).

If your credits, withholding, and estimated payments wind up less than your liability, you have a balance due (like needing to put in more dollar bills at the store).