How Big Is the Average American's Tax Refund?

By Matthew Frankel Markets Fool.com

There's no way to know what the average tax refund will look like in 2017 until all the 2016 tax returns are processed by the IRS. However, considering that there were no drastic tax changes last year, the 2016 data should be a pretty good indicator.

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I won't keep you in suspense: For the 2015 tax year (returns filed in 2016), the average American who got a tax refund received $2,860 from the IRS. More than 70% of tax returns resulted in a refund, which translates to about 111 million refunds totaling more than $317 billion.

Here's how American taxpayers plan to use their refunds in 2017 -- and what they should probably be doing with that money instead.

Image Source: Getty Images.

How Americans plan to use their refunds in 2017

The good news is that the majority of Americans are planning to use their refunds wisely. According to a recent survey by GoBankingRates, most Americans who are expecting a tax refund plan to either pay down debt or save their refund.

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Of the respondents who said they knew how they planned to spend their refunds, here's a breakdown of the answers given:

Plan for 2016 Tax Refund

Percentage of respondents

Put the money in savings

41%

Pay off debt

38%

Put the money toward a vacation

11%

Splurge on a purchase

5%

Make a major purchase (car, home, etc.)

5%

Data Source: GoBankingRates.

Now, the 79% of the respondents who plan to pay off debt or put the money in savings are being smart. After all, about half of Americans couldn't cover an unexpected $500 expense without borrowing the money or selling something, so this could go a long way toward improving the state of emergency savings in the U.S. And it's often unwise to save or invest if you have high-interest debt hanging over your head.

The 5% of respondents who plan to make a major purchase are the "middle ground." Putting the money toward buying a home, or a much-needed new car, can be a smart use of a tax refund if the purchase is necessary or could ultimately save the buyer money.

However, the 16% of people who plan to use the money to spoil themselves or take a vacation may want to reconsider.

When determining how to use your tax refund, keep in mind that the money was yours all along: It was originally part of your paycheck, and you simply allowed the government to withhold more than necessary. You didn't win the lottery, nor did you find a few thousand dollars sitting in the street. This is money that you've earned, so treat is as such. As a rule of thumb, I don't advise spending a tax refund on anything you wouldn't normally spend your wages on.

The younger generation is acting especially wise

Millennials are among the most responsible when it comes to spending their tax refund. Only 11% of the 25-34 age group plans to splurge or go on vacation with their refund -- significantly less than the overall average. While it makes sense that 29% of the 65-and-up age group plans to spend their tax refund in such ways (after all, this age group is more likely to have no debt and plenty of savings), the finding that 17% of the 35-44 age group plans to use their refund for a vacation strikes me as a bit high.

Was your tax refund too high?

At first glance, this might sound like a silly question. How can a tax refund be too high?

However, a big tax refund means that you essentially gave the federal government an interest-free loan -- allowing the IRS to hold thousands of dollars of your salary at no added benefit to you.

Think about it this way. If you get a $4,000 tax refund, this would translate to an additional $154 per paycheck for the entire year, assuming you get paid biweekly. This is extra money that you could have used to invest, pay your bills more comfortably, or build up a bigger cushion in savings.

Now, I'm not talking about people who receive large tax credits. For instance, if you get a $2,000 tax credit because you're a college student who paid tuition, your refund didn't come out of your paychecks.

On the other hand, if you simply let the government hang on to some of your money, say, by using the old "claim zero exemptions on your W-4" technique, it may be time to pay your payroll department a visit and adjust your withholdings to the appropriate level.

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