The Average Tax Refund This Year Is $3,025. Here's Why That's a Big Problem
- The average tax refund recipient this year is sitting on a lot of money.
- The larger your refund, the more of your earnings you gave up last year.
A higher refund isn't actually a good thing.
Now that the tax-filing deadline has passed and the IRS has processed its fair share of returns, the agency has dished out billions of dollars in refunds. And the average refund this year amounted to $3,025 as of the week ending May 6. That's an increase from last year, when the average refund came to $2,863.
At first glance, the fact that refunds rose this year may seem like a good thing -- especially if you were a recipient of one of those refunds and are now sitting on a nice pile of cash in your bank account. But actually, a higher refund isn't a good thing at all for one big reason.
Do you really want to wait to get paid?
Imagine you're entitled to a paycheck of $3,000 twice a month, only one month, your employer says, "You know what, I'm going to hang onto one of your paychecks and you'll get it nine months down the line."
Would your answer be "Sounds good, boss," or would you protest? Chances are, you'd do the latter.
Well, when you get a large tax refund, you're effectively telling the government that it's okay for it to hang onto a portion of your earnings for an extended period of time. It's a big misconception that a tax refund represents free money. It doesn't. A tax refund is your money you were entitled to and didn't collect.
Meanwhile, have you ever taken out a loan, whether to buy a car, home, or something else? You no doubt paid interest on that loan, since lenders don't commonly loan money out of the goodness of their hearts.
Well, when you get a large tax refund, you've effectively given the government a loan. Only guess what? You're not collecting any interest on it. And that's a pretty bad deal all around.
Set yourself up for a smaller tax refund
If your tax refund this year was anywhere in the ballpark of $3,025, you may want to adjust your tax withholding to get more money in your paychecks as you go. In fact, think back to last year, when living costs started to soar. Could you have used an extra $250 a month in your paychecks? Probably.
Your tax withholding is something you should be allowed to change as frequently as you want, so if you got a large tax refund this year, speak to your payroll department about making an adjustment to have less tax taken out of your earnings. That way, you'll have access to more of your money.
If you're worried that doing so will result in you owing the IRS money next year during the tax-filing season, a good bet is to take the extra cash in your paychecks and stick it into a dedicated savings account. If you end up owing the IRS next year, you can dip into that account as needed to pay your tax bill. Meanwhile, you'll be the one earning interest on that money, and you'll also have access to it so that if a surprise bill arises, you'll have the option to take a withdrawal.
Many taxpayers rely on refunds to cover their bills and pay off debt. But waiting to collect money you're entitled to just doesn't make sense. And if you start collecting more of your earnings up front, you might avoid having to struggle with bills or rack up debt in the first place.
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