How it works (Example):
A tax refund is the difference between taxes paid and taxes owed. Each year (or each quarter, in some cases) a taxpayer submits a tax return that calculates his or her federal income taxes owed. The taxpayer then submits the tax return electronically or via mail and the IRS reviews the information. If the taxpayer has paid more taxes than he or she owes, the IRS will issue a refund within 10-21 days (if the taxpayer files electronically).
Typically, tax refunds occur because employees have too much withheld from their paychecks. Adjusting these withholding amounts can ensure that the taxpayer pays just enough taxes during the year.
Why it Matters:
Although it's always exciting to get a check in the mail, a tax refund is not necessarily a good thing. If you receive a tax refund, it means you have had more taxes taken out of your paychecks than is necessary. It's akin to giving the government an interest-free loan. Thus, a tax refund is usually an indication that the taxpayer needs to do some better tax planning.