Tax returns 2018: Here are the best and the worst places to live for getting a tax refund

Of the Americans who file taxes, 78% get a refund — and the average refund is $3,052. You might feel tempted, then, to pity San Francisco, where a full quarter of residents diligently file their taxes only to learn they actually owe an average of more than $7,000, according to new analysis from personal finance site MagnifyMoney based on IRS data from 2012 to 2016.

But while it may sound like residents of the city by the bay are getting a raw deal, that’s actually not the case, according to MagnifyMoney executive editor Mandi Woodruff. In the case of San Francisco, small or nonexistent refunds could just as likely be a sign that filers underestimated the capital gains tax on their well-timed bitcoin speculation, made bank off the stock market’s recent run-up or sold their home at just the right time.

“No one needs to feel sorry for people in San Francisco,” Woodruff said in a phone interview. According to census data, the San Francisco metro area in 2016 had a median household income of nearly $97,000 — the highest in the nation.

By contrast, “you should feel sorry for people in McAllen, Texas,” Woodruff said. Not only is the median household income there around $46,000, but McAllen residents typically owe about 16% of their income to the IRS — compared to the 7% San Francisco residents end up paying on average. That’s a bill that can actually hurt, Woodruff said.

Miami and Las Vegas are other cities where people’s tax bills seem to run high, though it’s important to note that this isn’t necessarily the same as being overtaxed. Some of the biggest refund checks, MagnifyMoney found, are in New York, a city that happens to be in the highest taxed state the country, according to a review by WalletHub.

The study did not examine why, exactly, taxpayers in some places are less likely to get refunds. But there are several reasons why some people receive smaller refunds in general.

For example, gig workers who don’t have taxes withheld from their pay like regular employees may simply owe more because they never paid taxes on that income in the first place. You could also end up owing more than expected if you choose to itemize but make a mistake, like forgetting to deduct your home office, that lowers your refund. That’s especially true if you have a complicated return and not a lot of resources for professional help.

On the flip side, some people actually choose to owe Uncle Sam more money come tax time (by, say, lowering their withholdings) to avoid giving the IRS what is effectively an interest-free loan.

A big refund check signals that you’re letting money sit in government coffers — dollars you could have put to better work by paying down some debt or padding a retirement account. After accounting for the interest you could have earned — or avoided paying — if you got your money sooner, that $3,000 check from Uncle Sam could have been worth even more.

So, how can you make the most of tax time, especially in light of the recent overhaul to the tax code? For now, the old rules still apply, and 2019’s tax forms should be at least a little easier to fill out — by making the standard deduction more generous, lawmakers have lessened the payoff of taking the time to file more complicated, itemized returns.

That said, you might make filing your 2017 return an opportunity to get ahead for next year by double-checking that your employer is withholding the right amount of money from each paycheck. As Bloomberg’s Suzanne Woolley noted, there’s a good chance you’ll need to tweak your withholdings to avoid underpaying your taxes or possibly owing a penalty.

If you’re worried about getting a tax bill you can’t afford, it’s all the more important to file sooner rather than later, Woodruff said. The IRS provides payment plans, and if your shortfall is less than $50,000, you can apply for those payment plans online and avoid the possibility of having your outstanding debt go into collections. These programs do charge a $225 fee, though the fee drops to $31 if you agree to have your payments debited directly from your bank account.

A final tip to keep in mind? There are still ways to file your taxes for free, even if you make more than $66,000 annually — the cutoff for many of the IRS’ free filing programs. You can read more about how to file your taxes for free in our guide here.

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