Last Day to File 2019 Taxes

Tax Day

Today is the last day to file your 2019 federal income taxes and have them considered on-time. The usual tax filing deadline of April 15 was pushed back to July 15 this year due to the impact of the Covid-19 pandemic.

IRS Pays Interest!

Something that is a little bit different this year, other than the delayed deadline, is that the Internal Revenue Service will be paying taxpayers interest for the period after April 15! You heard that right… the IRS is actually going to pay us more money due to the tax filing deadline being extended. The way the guidance reads is that even if you wait to file until July 15, you will be paid interest for the three months between April 15 and July 15.

Any tax refunds paid after April 15 will earn interest at the annual rate of 5% for the second quarter of the year and if you’re still waiting into July, 3% for the third quarter. Most people I know have been receiving their refunds rather promptly this year, however I appear to be the exception. I filed my taxes at the end of March and they are still stuck in some sort of IRS purgatory and the Where’s My Refund page says that my refund is still “processing.”

Considering that high-yield savings accounts are only paying 1%, this tax refund delay is actually paying quite well. Now, it would be nice to get some clarity from the IRS on why my refund has been “processing” for three months now and how much longer my funds will be tied up, but knowing that I’ll be receiving interest when the refund finally comes helps ease the wait a bit.

What’s the average tax refund?

While we’re talking about refunds, the average IRS refund for the 2018 tax year was nearly $3,000. I’ve often wondered why so many people prefer to lend the government their money interest-free (between the pay period deduction and April 15 this year, but normally completely interest free). Ending up with a four figure refund would tell me I need to adjust my withholdings and keep more of my money each paycheck. But I’ve heard from friends that they use the large tax refund as a forced savings mechanism. In the days of 1% “high-yield” savings accounts, it’s hard to argue with that logic if it helps someone in an “out of sight out of mind” kind of way. At the same time, I have to say I’d rather keep control of that money myself than have it stored in the IRS’s account and, as is happening to me this year, now knowing when that money might get returned to me. An easy solution is to increase your withholding exemptions on your W-4 and then set up an automatic transfer from your checking account into a savings account on payday so you never miss the extra money!

In the current pandemic induced double-digit unemployment rate environment, it’s important to ensure you have topped off your emergency fund of six months expenses, so that’s the first place that tax refund money should go. Next stop is any credit card debt that you’re carrying an interest-bearing balance on. But if you’ve got the emergency savings and credit cards covered, then think about what that average refund of almost $3,000 could do for bolstering your retirement savings. $3,000 is half of the annual contribution limit for an Individual Retirement Account, which incidentally will also lower your tax bill further if you contribute to a traditional IRA.

In 17 years of investing that average tax refund of $3,000, and earning an 8% rate of return, you’ll have an extra $100,000 to your name! But what if you’re already maxing out your IRA each year? An extra $3,000 could be put toward maxing your Health Savings Account, funding a 529 College Savings Plan for your kids, or buying some dividend stocks in a taxable investment account.

What people do with their refund

Now that you know what you should do with your tax refund, let’s take a look at what people actually did with their tax refunds last year.

Infographic: How Americans Spend Their Tax Refunds | Statista You will find more infographics at Statista

I’ll be honest, this chart is rather surprising to me as I remember my days working retail and how busy it was with sales of expensive televisions, game systems, and other gadgets around tax time. There’s even stores that offer no payments on purchases early in the year until you get your tax refund to pay them back in April!

Since we are a little more than halfway through 2020, it’s a good time to check your W-4 withholding allowances and retirement contribution levels to ensure you’re on track for a successful 2020! And if you haven’t yet filed your 2019 taxes, the time is now!