The deadline for filing a tax return is now a little less than a month away, and a new Bankrate survey has found that 51% of Americans will get some amount of federal refund this year. Here’s a closer look at what Americans plan on doing with their refund checks this year, what you should do with yours and why a big tax refund might not necessarily be a good thing for your finances.
More Americans Splurging
Thirty one percent of those receiving a refund this year plan to save or invest that money, down from 33% last year. The percentage of people that intend to use their refund to pay down debt also dropped from 34% last year to only 28% this year.
At the same time, the percentage of people that intend to splurge on vacations, shopping sprees or other indulgences has doubled from 3% to 6% this year.
Spending your tax refund is certainly good for the economy, but it’s only responsible if debt and living expenses are not an issue.
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What To Do With Your Tax Refund
The IRS expects that the average refund this year will be around $3,200. If you’re unsure about what to do with your refund, paying off debt should take top priority.
According to Robert Semrad, a senior partner at DebtStoppers, debt should always be paid off from highest to lowest-rate debt, which often starts with high-interest credit card debt.
If you are one of the lucky Americans who is living debt free, starting an emergency savings fund, saving for retirement, or setting up a 529 college savings plan for your children are three other good ideas for this year’s refund.
Planning for Next Year
While many people think of their tax refunds as free money, few realize a large refund could actually be doing you financial harm.
“There’s this perception that getting a tax refund is in your best interest because it’s like found money, but why give the federal government a zero percent-interest loan with your money?” Andrew Ferraro of Strategic Wealth Partners asks.
Ferraro points out that excess withheld income could instead be put to work year-round to help Americans pay down high-interest debt or earn investment returns.
To reduce the amount of income that the IRS withholds from every paycheck, you must complete an adjusted W-4 form or follow the instructions the IRS provides on its tax withholding webpage.
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Most Americans have yet to get this year’s tax refund, but now is the right time to begin thinking about the smart and responsible ways to use it. In fact, it may even be time to consider reducing your withholding and putting more of your hard-earned money to work before next April rolls around.