Key Findings
- The average tax refund in 2023 was $3,167, down 2.6% from 2022, according to IRS data.
- Filing your taxes online typically results in a refund coming weeks sooner than returns filed through the mail.
- The IRS’ free “Direct File” pilot program is now available in 13 states for taxpayers meeting certain criteria.
- With the federal funds rate expected to go down in 2024, many experts suggest that CD and savings rates are at or past their peak.
Tax and Savings Trends To Watch in 2024
One of the biggest developments in the tax world this year is a new option for free online filing. The IRS recently announced the Direct File pilot program, which allows taxpayers to file their taxes electronically straight through a government website.
But once the filing is done, recent financial industry trends could influence how you use your refund Though savings and deposit rates currently exceed 5%, they’re expected to decline significantly before the end of 2024.
Taxpayers wishing to invest their refunds should consider filing earlier to lock in and capitalize on a historically high federal fund rate, said Andrew Cohen, senior lecturer at Old Dominion University.
“The optimal time for submitting tax returns varies based on personal circ*mstances,” Cohen advised. But a proactive approach can maximize your tax return’s potential by earning more interest over time.
You May Be Able to File Online for Free in 2024
Eligible taxpayers in select states now have the opportunity to file their 2023 federal tax returns free with the IRS Direct File pilot program. Taxpayers must have lived in the following states for the majority of 2023 to be eligible:
- Arizona
- California
- Florida
- Massachusetts
- Nevada
- New Hampshire
- New York
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
However, if your money comes from your own business or the gig economy, you are ineligible. You also cannot use the Direct File tool if you itemize deductions or qualify for the Child and Dependent Care Credit, Saver’s Credit, or Premium Tax Credit. Note that this pilot program doesn’t include individual state returns.
The IRS Direct File tool offers guidance throughout the filing process, including access to live chat with an IRS customer service agent. English and Spanish versions are available. Future plans for the Direct File tool include integrating state taxes and refining customer support. You can read more about the IRS Direct File tool on the IRS website.
Savings and Deposit Rates Are High Right Now
Investing in short- and long-term savings has never been more achievable. Current CD rates soar as high as 5.5%, and numerous high-interest savings accounts offer up to 5.45% interest. High-yield savings accounts and CDs offer consumers a low-risk, FDIC-insured solution for excess funds.
Savings and Deposit Rates Are Likely To Go Down This Year
Despite a federal funds rate at a 20-year high of 5.25% to 5.5% in the early months of 2024, economists with Morningstar expect a drop of 150 cumulative points by the end of this year. Talk of lowering the federal funds rate has surfaced several times throughout the year, with experts pointing to the Federal Open Market Committee meeting scheduled for the end of April or the beginning of May as the start of the first rate decrease.
That means you may want to lock in a savings rate as soon as possible. A CD offers you that ability, providing a higher rate of interest in return for a commitment to keep your money at the bank for a certain period of time. This appeals to people with no immediate needs for the cash, Cohen of Old Dominion University said.
However, high-yield savings accounts are another, more flexible, option. The interest returns tend to be lower and can change at the bank’s will. But they also allow you to use the money whenever you see fit.
Where To Put Your Tax Return in 2024
The best way to allocate your tax return depends on your financial circ*mstances. Ideally, you would use your return to improve your financial standings, but individual goals and results may vary.
Common Tax Return Mistakes to Avoid
Dr. Tanaka Chimbane of Texas Tech University holds a Ph.D. in Personal Financial Planning. In her experience, taxpayers make several common mistakes in determining how to maximize their tax returns, including the following:
- Not having a plan
- Neglecting emergency funds
- Ignoring high-interest debt
- Lack of research
If you’re still struggling to find the best solution for your tax refund, reaching out to a financial counselor can help. “Professional guidance can provide valuable insights,” Chimbane advised. Maximizing your tax return often requires discussing potential benefits with experts who can point out areas of concern you may have overlooked.
Paying Down High-Interest Debt Is a Smart Move
Reducing debt remains one of the most commonly cited pieces of advice regarding spending your tax refund.
“If you get a tax refund and are carrying credit card debt, pay off the credit card debt before investing the refund in the market,” said Dr. Terrance Odean, Rudd Family Foundation Professor of Finance at the University of California, Berkeley.
Decreasing your overall debt can improve your debt-to-income ratio (DTI) and credit score, making it easier to qualify for loans. Your DTI measures your monthly earnings against all existing loan payments.
High-Yield Savings Accounts Provide Flexibility While Generating Interest
Some of the best free checking accounts also offer free savings accounts with high annual percentage yield (APY) rates. Maintaining checking and savings accounts at the same bank allows you to quickly transfer funds when necessary. Although many high-yield savings accounts require a minimum balance to earn the highest APY, withdrawing your savings doesn’t affect your bottom line like cashing out a CD does.
CDs Offer a Safe Place to Stash Your Return
Placing your tax refund in a CD account can feel like a personal financial time machine. The key to CDs lies in preparing for the long haul and setting aside disposable income you’re confident you won’t need. With CD rates as high as they are now, you can realize a more significant return on investment when they mature.
Long-Term Investments Can Be a Good Option for People in Good Financial Shape
With debts accounted for and emergency funds tallied, many taxpayers turn to long-term investments. Relatively low-risk, these investments can take up to several years to mature. However, the best investment portfolios incorporate several opportunities of varying risk to maximize invested funds.
Tax Returns 2024: What to Know
Despite a decline in the average tax refund from one year prior, Americans still saw an average of more than $3,000 per tax return. Let’s explore how this statistic relates to average tax returns in years past and how filing electronically can help you maximize your taxes to their full potential.
Average Tax Refunds
Despite record-breaking average federal tax refunds in 2022, average refunds in 2023 totaled $3,167, a decline of 2.6%.
Historically, taxpayers saw their lowest tax refund only three years prior, a $500 or more difference that could significantly impact many a bottom line. With the average tax refund over the past decade totaling $2,889, previous data indicates a return to sub-$3,000 average returns in the coming years.
Lower tax returns can also affect consumers in several ways, especially those who rely on the higher-than-average federal funds rate to increase their savings balances.
Filing Electronically Has Several Advantages
According to the IRS, refunds on electronically filed returns tend to arrive up to seven days sooner than those filed by mail. Acceptance or rejection also happens promptly when filing online, which can help mitigate delays caused by inaccurate or incomplete returns. Many taxpayers also rely on several tax preparation companies that offer access to modern filing software, complete with audit protection, additional security measures regarding identity theft, and maximized deductions that provide peace of mind when filing online.
Play It Smart To Get the Biggest Return on Your Return
Figuring out what to do with your tax refund manifests differently based on personal preference, financial obligations, and overarching goals. Maximizing your 2024 tax return might mean opening a CD, contributing to a high-yield savings account, or investing in one or more ventures. Exploring your options can help you make the best decision based on your circ*mstances. Regardless of your chosen path, having a plan in place can assist with meeting this year’s goals and planning for next year’s return.
Methodology
In order to help our readers gain a comprehensive understanding of what to expect from their taxes, effective tax filing strategies and their options for what to do with their returns, we at the MarketWatch Guides team conducted a rigorous study into the subject. We analyzed data from the IRS, the U.S. Bureau of Labor Statistics, the U.S. Federal Reserve and MarketWatch internal research. Our team also spoke to experts in the fields of finance and accounting to get their perspective and advice for taxpayers.
Our data sources include:
- Internal Revenue Service, Filing season statistics by year, 2009-2023
- U.S. Federal Reserve, Federal Open Market Committee, Meeting calendars, statements, and minutes (2019-2024)
- U.S. Bureau of Labor Statistics, Consumer Price Index Historical Tables for U.S. City Average, 2013-2023
Our Experts
Terrance OdeanRudd Family Foundation Professor of Finance at the Haas School of Business at the University of California Berkeley
Tanaka ChimbaneAssistant Professor in the School of Financial Planning at Texas Tech University
Andrew CohenSenior Lecturer in the Department of Finance at Old Dominion University
If you have feedback or questions about this article, please email the MarketWatch Guides team at[email protected].
