There's been a lot of anxiety around filing taxes this season, due very much in part to the fact that it's the first year taxpayers are grappling with the new laws that took effect in 2018. As part of that major overhaul, a number of key tax breaks were altered or eliminated, thereby leaving filers with fewer options for lowering their IRS burden.
On the other hand, last year's tax overhaul did promise to put more money into working Americans' pockets. Now for many Americans, that meant getting more money in their paychecks -- money that many were warned to therefore not expect in refund form. But new data from Credit Sesame shows that refunds are, in fact, up this year compared to last.
IMAGE SOURCE: GETTY IMAGES.
As of March 15, 2019, the average tax refund among those surveyed by Credit Sesame was $3,068. That's up from $3,046 for the 2018 tax filing season. Here's how those refunds broke down by generation:
Average Tax Refund as of March 15, 2019
DATA SOURCE: CREDIT SESAME.
Clearly, there's a substantial divide on the refund front. Baby boomers lead the way in refunds, but a good reason likely stems from the fact that they own property and are more aggressively funding their retirement plans than younger generations are. As a reminder, contributions to non-Roth retirement plans are, in the case of 401(k)s, made with pre-tax dollars, while IRA contributions are tax-deductible. Members of the silent generation, meanwhile, are less likely to carry mortgage debt, leaving them with less of a tax break. And since they're largely in retirement, they're clearly not funding their retirement plans.
What is surprising is that Gen Xers have seen lower refunds than millennials and Gen Zers, since they're more likely than their younger counterparts to own homes and benefit tax-wise that way. This shows that clearly, property ownership isn't the only factor that influences refund totals.
Is a larger refund a good thing?
Many tax filers are wired to believe that the greater their refunds, the better. In reality, a more substantial refund means that you gave the government a larger interest-free loan during the year for nothing in return, when you could've instead been collecting that cash along the way. This is especially important for folks with little to no savings who live paycheck to paycheck. Having a few extra hundred dollars land in your bank account each month could spell the difference between racking up debt and avoiding that unwanted fate. Therefore, if you're looking at a sizable refund this year, you might think about adjusting your withholding so that you're claiming more allowances on your W-4. This will give you access to more of your money up front.
If you're worried that getting more cash in your paychecks will result in an underpayment of taxes (thereby creating a situation where you owe the IRS money during next year's tax season), here's a simple solution: Take that extra money and stick it in a dedicated savings account so that you earn interest rather than let the government do so. If you need that money for emergencies during the year, you can dip into that account as needed. Otherwise, let it sit and grow modestly. Then, if you do end up owing the IRS money during the 2020 filing season, you'll have a means of paying that tax debt.
It's too soon to tell what tax refunds will look like on a whole this season, since many filers will inevitably wait until the last minute to get their returns submitted. Either way, one thing's for sure: If you're getting a refund this year, use it wisely -- especially if you've been living paycheck to paycheck without a financial safety net to fall back on.
More From The Motley Fool
- 10 Best Stocks to Buy Today
- 3 Stocks That Are Absurdly Cheap Right Now
- 5 Warren Buffett Principles to Remember in a Volatile Stock Market
- The $16,728 Social Security Bonus You Cannot Afford to Miss
- The Must-Read Trump Quote on Social Security
- 10 Reasons Why I'm Selling All of My Apple Stock
The Motley Fool has a disclosure policy.