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Tax refund tips

A man sits at a table, counts money and plans his budget based on the statistics of his monthly expenses after the tax refund

People who work and pay income tax in the Philippines are eligible for a refund if they overpaid taxes. Use this opportunity to your advantage. MyCredy has prepared some basic practical facts that will help you understand the process of returning overpaid money in 2023 and some valuable tips on how to use this money to your advantage.

Income Tax Refund – what exactly is this?

If the taxpayer has paid more taxes to the state than is legally allowed, then the taxpayer has the right to get his money back. The source of tax refunds can be wages, freelancer income, and payments to organizations that are tax-exempt as well. Whatever the origin, you must avail tax refund not later than two years from the supposed filing. There are various factors on which the refund amount depends. The amount of taxes paid, the tax category and the use of tax incentives affect the final amount of the refund. Anybody who pays income tax may apply for tax refunds. Employees, registered businesses (including self-employed individuals and freelancers) and juridical persons like Corporations and Partnerships can count on this opportunity.

Who, how and when will receive a tax refund?

For some reason, your employer withheld too much tax from your paycheck. Or you are a self-employed person and made a mistake doing a computation. No worries - in case of miscalculation, you can have your rebate. But do not rely on the 100% refund - the income tax is computed and paid correctly with first time mostly. Aside from the chance of the tax calculation error, usually, tax withholding is affected by moving to another company where your new employer withheld more taxes from your paycheck than necessary, as well as a change in your taxpayer status, for example, the appearance of a dependent in your name.

Employees sometimes overpay their taxes even if they do not have control over their payment because their employers file their tax returns on their behalf. If you have only one employer for the whole taxable year and when both you and your spouse have no business you are qualified for substituted filing. You do not need to apply for a tax refund because your employer will be the one who will return your excess tax payments. It is called year-end adjustments, this process is automatic and will require no additional action from the employee.

The rules are slightly different for employees who are not qualified for substituted filing and business owners, including licensed professionals, self-employed individuals, and freelancers. Taxpayers who are required to file their own taxes using their respective tax returns must provide evidence of their overpayment by submitting tax withholding certificates - BIR Form 2307 for businesses and BIR Form 2316 for employees. The total amount indicated in all the certificates shall be their creditable withholding tax (CWT) for the year. If their tax due is lower than their total CWT, the taxpayers may choose:

  1. to avail of a tax refund;
  2. carry it over to the following taxable year, which they can use to pay their taxes for the succeeding year.

The option chosen is final and cannot be changed.

On or before January 25 of the following year tax refunds are given to employees qualified for substituted filing. The second type of taxpayers refunds receive after the Commissioner of Internal Revenue has declared that the taxpayer has no other tax liability to the BIR. The processing time depends on the legal basis of the application and how much the taxpayer claims.

Smart ways to use your refund

A tax refund could be enough to jump-start a savings plan or help to pay down debt, but that’s only if the money is used wisely before it gets frittered away or spent on groceries and regular bills. Here are some best options if you are looking for a way to use your tax refund for maximum impact:

  • Increase your emergency fund;
  • Boost your retirement savings;
  • Prepay your vacation or save for short-term goals;
  • Purchase a life insurance policy;
  • Invest in yourself. Gym membership or a new wardrobe - your choice;
  • Build your own or your kid's college savings;
  • Pay for some home improvements, such as new furniture;
  • Save for your health;
  • Consider using your refund for a charity.
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