As we progress through the 2023 tax season, many Americans have their eyes on a potential tax refund. But getting money back from the government can actually be a double-edged sword.
Earning a large tax refund may mean that you gave Uncle Sam an interest-free loan throughout the course of the year instead of putting that money to work for you in other ways.
Still, the majority of people who file a U.S. tax return every year end up getting a refund. For the 2021 tax year, which involved tax returns filed in 2022, U.S. individual taxpayers logged an average federal refund of $1,798.
To determine where taxpayers receive the largest refunds, SmartAsset analyzed the average dollar amount of 2021 federal tax refunds for all 50 states and the District of Columbia. Though it did not play a role in our rankings, we also examined state and local income tax refunds for tax year 2020.
For details on our data sources and how we put all the information together to create our final rankings, you can read more in the Data and Methodology section below.
Key Findings
- Four income-tax-free states rank in the top 10.These states are Wyoming, Texas, Alaska and South Dakota. (In total, nine states have no income tax.) Wyoming residents saw refunds of $1,802. Texas residents took home $1,783. Alaska taxpayers had refunds of $1,734. For South Dakota, the average refund totaled $1,721.For context, the national average tax refund amount in 2021 was $1,798.
- Nationally, there was a $417 decrease in average federal tax refunds between 2020 and 2021.The COVID-19 pandemic inspired special tax benefits for the 2020 tax year, which could explain the drop in average refunds. In 2021, the U.S. had more than 600 million tax returns with federal tax refunds, compared to more than 303 million in 2020.
1. Utah
Utah's average federal tax refund for 2021 was $1,812. With 5.4 million tax refunds issued, the state's average may have benefited from boosted tax credits for children as the average household size was higher for 2021 in Utah than in any other state.
2. Wyoming
Wyoming is the first state on the list without a state income tax. The average federal tax refund in 2021 was $1,802. This was calculated from only about 1 million federal tax refunds issued. The state had the fewest number of tax refunds issued out of all states in 2021.
3. Texas
Texas is another state with no state income tax. Residents received an average federal tax refund of $1,783 in 2021. Texas received the second-largest total refund amount (nearly $94 billion) of all states, with only California getting more total refund dollars.
4. North Dakota
North Dakota comes in fourth with an average federal tax refund of $1,750 in 2021. The government issued nearly 1.4 million refunds. The average state and local tax refund is less than half the federal figure at $820.
5. Illinois
Illinois ranks fifth with an average federal refund of $1,739. Illinois also had the second-lowest average state and local tax refund out of all states in 2020. It was just $581. Only Pennsylvania had a lower average refund ($534).
6. Alaska
Alaska is the third state on the list without a state income tax. It received an average refund of $1,734 in 2021. The federal government issued more than 1.3 million refunds that tax year.
7. Kansas
Kansas comes in seventh, right behind Alaska with an average federal tax refund of $1,728. More than 5 million refunds went to Kansas taxpayers in 2021.
8. South Dakota
South Dakota is the last state in the top 10 without a state income tax. The state had the fourth-fewest number of total tax refunds issued (1.6 million) in 2021, behind Wyoming, North Dakota and the District of Columbia. The average federal tax refund was $1,721.
9. Nebraska
Nebraska comes in ninth with an average federal tax refund of $1,716 in 2021. This was calculated from more than 3.4 million refunds issued that year.
10. Oklahoma
Oklahoma rounds out the top 10 on the list with an average federal refund amount of $1,715, just $1 behind Nebraska and $3 higher than a three-way tie for 11th place between New York, Tennessee and New Jersey.
A Double-Edged Sword
While getting a large tax refund may feel like scoring free money, keep in mind that getting little to no refund may not necessarily be a bad thing.
"That money may have been working harder for you by gaining interest in a bank account, earning returns in an investment fund or paying for living expenses," says Susannah Snider, certified financial planner and managing editor for financial education at SmartAsset.
Employees may consider adjusting their tax withholding on their form W-4 to take more money home each month and receive a smaller refund at tax time. "Especially in an environment of rising interest rates, it's worth it for workers to consider adjusting their withholdings to reduce their tax refund amount and keep more money in their pockets throughout the year," Snider says.
Data and Methodology
To find the states with the largest tax refunds, we examined data for all 50 states and the District of Columbia, focusing on two data points:
- The total dollar amounts of federal tax refunds.This is how much each resident receives in a refund, on average, taken by dividing the total amount refunded in the state by the total number of refunds.
- The total dollar amounts of state and local tax refunds. This is the amount each resident received as a refund from filing their state taxes, dividing the total amount refunded in the state by the total number of refunds submitted.
For each state, we divided the total dollar amount of federal tax refunds by the number of federal tax refunds issued in that state. The result represents the average federal tax refunds. We used this dollar figure for each state to rank the entire list from highest to lowest.
All data comes from the IRS. Federal tax refund data is for the fiscal year 2021 while state and local income tax refund data is for the tax year 2020.
Tips for Tax Planning
- Work with a financial advisor.A financial advisor can help you manage your finances while making sure that you've thought through the relevant tax impacts of your decisions.SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Calculate your expected federal tax liability. You can calculate your expected tax liability throughout the year, so you can better predict a potential return. Try SmartAsset's free federal tax calculator to try it out for yourself.
- Adjust your withholdings on your W-4. Your money may work harder for you if you can keep it in your pocket - and save or invest it - during the year. To avoid under- or over-paying taxes throughout the year, employees can adjust their withholdings on their W-4 form. SmartAsset's free paycheck calculator can give you a sense of how different withholding amounts can impact take-home pay.
Questions about our study? Contact press@smartasset.com.
Photo credit: @iStock.com/pcess609
