The 2015 tax season is well underway. The IRS started processing tax returns on Jan. 20 and began issuing refunds a few days later. Now that we're over a month into tax season, the IRS has released statistics on the first 30 days of tax returns. Read on to learn what the average American's IRS refund is, how you can increase your refund for this year, and how best to use your refund.
In the first 30 days of the tax season, the government processed over 48 million individual income tax returns. Forty million Americans, or 83% of those who have filed their income tax returns so far, got a refund from the IRS, and 93% of those refunds were done via direct deposit, which is the fastest way to get your tax refund. The IRS has refunded just under $125 billion to those who have filed already, for an average refund of $3,120 so far this tax season.
Although most tax breaks for the 2014 tax year apply only to actions taken in 2014, if you haven't filed yet, there are still a few ways you can boost your tax refund -- and many ways to use your IRS refund to your gain.
Opportunities to raise your IRS refund
There are two ways left to raise your IRS refund for tax year 2014:
- Contribute to an traditional individual retirement account. You have until April 15 to contribute up to $5,500 ($6,500 if you're aged 50 or older) to an IRA for the 2014 tax year. Contributions to a traditional IRA are tax-deductible, though the deduction can phase out if you're covered by a retirement plan at work and your income is above a certain level. The IRS has more details if you're interested.
- Contribute to an HSA. You also have until April 15 to fund a health savings account, though you need to have a high-deductible health plan, or HDHP, that's HSA-eligible. Now that Obamacare has taken effect, many more people are using HDHP plans and accompanying HSAs. For an HSA, you're allowed to contribute up to $3,300 ($4,300 if you're 55 or older). This money is tax-deductible, and you can withdraw it for eligible medical expenses at any time, though it's up to you to make sure your expenses are eligible. If you withdraw money and the expense isn't eligible, you'll have to pay taxes on the money, as well as a 20% penalty.
All that said, keep in mind that a big IRS refund isn't necessarily a good thing. A $3,120 IRS refund equates to $260 a month you could have used over the course of a year, rather than lending to the government interest-free. If you're expecting a big refund again next year, consider asking your employer for a copy of your W-4 and reducing how many withholding allowances you take. Doing so will reduce the amount your employer withholds for the government from your paycheck, and it means faster access to your money.
Further, that big yearly check leads many people to spend the money unwisely. Let's consider the best ways to put your IRS refund to use.
Best ways to use your IRS refund
Many people fall into the trap of mental accounting, in which they treat money from different sources differently. People are more likely to spend "found" money than they are to spend "earned" money, even though both are simply money. Because IRS refunds come as one large check, many people end up spending the money on frivolous items they would not have bought if the money had come in their paychecks over the course of 12 months. Don't fall into this trap!
For everyone who gets an IRS refund, this is a great opportunity to use that big check to get you closer to your financial goals. As a rule of thumb, your first goal should always be to pay off high-interest debt. Beyond that, this is a great time to:
- Make an extra mortgage payment
- Save for a down payment on a home
- Contribute to a 401(k) or IRA
- Open a college fund for your kids
No matter what you choose, make sure you take advantage of this opportunity. Getting rich is simple but not easy. You need to be disciplined enough to save and invest your money wisely, no matter where it comes from.