The biggest tax question on most people’s minds as filing season gets underway is whether they’ll get a refund or owe the IRS money.
The average tax refund last filing season
The average tax return for the 2019 tax year was $2,535, an 11.4 percent drop from the previous year. About 168.7 million tax returns have been filed in the 2020 tax filing season, and of those, 152.8 million were filed electronically. Of e-filed returns, tax professionals prepared 80.6 million of them; the remaining 72.2 million were self-prepared.
There have been 125.3 million refunds issued totaling $317.7 billion. Of the refunds, more than 102 million were direct-deposited.
The average tax refund by year
Each year, taxes come out a little different. It’s a result of a lot of factors: tax requirements set by the government, unemployment rates, etc. This is what the average tax refunds looked like over the past couple years.
|Tax year||Average tax refund (end of season numbers)||Percent change from same time period in the previous year|
How tax refunds work
As a U.S. resident, you must pay a portion of all your earnings to the federal government to meet your tax obligation. Your employer is responsible for collecting taxes from every paycheck and paying the IRS on your behalf.
How much you pay in federal withholding depends on your earnings and how you fill out IRS Form W-4, which goes to your employer and includes your filing status and number of dependents. The more dependents you claim, the more money you get to keep each pay period.
In addition, taxes for Social Security and Medicare are withheld from your check. These are called FICA (Federal Insurance Contributions Act) taxes. In 2020, the FICA tax rate was 7.65 percent: 6.2 percent for Social Security (listed as OASDI on your pay stub) and 1.45 percent for Medicare.
There is a wage ceiling for Social Security taxes. For 2020, it was $137,700. Gross income above that threshold is exempt.
When it’s time to file your taxes, you tally all your earnings, deductions and any tax credits you might have to see what your true tax obligation is for the year. If you had too much money withheld from your pay, the IRS owes you a refund. If too little was deducted from your pay, you will owe the IRS the difference.
Lower tax refunds can be a good thing
It’s nice to see a tax refund show up in your bank account, especially if it’s a sizable one. But a big refund means you are giving the IRS more money during the year than you have to. And when the IRS sends you a refund, it doesn’t come with interest.
On the other hand, if you owe the IRS at tax time, it means you’re not having enough taxes withheld from your pay throughout the year. While it may be nice to have the extra money every pay period, you’ll have to write a check to the IRS after paying employment taxes all year.
Ideally, you want your tax bill to come out to $0, or very close to it. If you’re paying the IRS too little or too much throughout the year, adjust your W-4. Use the IRS tax withholding estimator to figure out how many exemptions to claim.