So, you’re fortunate enough to receive—or anticipate—a tax refund. That’s great news! However, before treating it like a year-end bonus or extra spending cash, it’s important to recognize that most of it is simply money you’ve already earned.
While a portion of your refund may come from tax credits or deductions, the bulk of it is actually an overpayment—meaning you withheld more in taxes than necessary throughout the year. In essence, the IRS is just returning your own money.
Just like your regular income and savings, it’s important to be financially savvy with this windfall—unlike many Americans who may spend it impulsively.
Recent surveys show that approximately 75% of Americans expect to receive a tax refund this year.(the average is around $3,100), with 52% considering it essential for their financial situation. This is not surprising as over 40% of taxpayers live paycheck-to-paycheck and rely heavily on the refund payment (and hence the frustration with recent delays).
The majority of filers getting a refund plan to allocate their refunds toward everyday necessities such as bills (50%), groceries (40%), and paying off credit card debt (35%). Only 13% planned to allocate their refund toward retirement savings.
Less than 10% of taxpayers plan to use their refunds on non-essential purchases like new clothing or entertainment. This shift is likely driven by rising inflation and increased living costs. In previous years, discretionary spending was a much larger category for refund use, but current economic pressures have probably led more people to prioritize essentials over splurges.
Where are tax refunds spent?
The pie chart below shows this breakdown, with most of the refund going towards paying down debt or bills. The average tax refund could cut almost a third of the average credit card debt.
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So how should you spend and invest your tax refund?
Here are my top 5 ways to make the most of your refund, many of which people are already doing based on the research report findings.
1. Pay off high interest debt, like that on credit cards and personal loans. This will deliver the biggest bang for your bucks over the long term.
2. Create or add it to an emergency fund that gives you three to six months of cushion if you or your family lose your jobs or run into a financial emergency. Put this money into a good high yield savings account
3. If the refund is substantial enough, invest it. Find a good low cost broker like Robinhood and open up a trading account with the refund check. Then do your research and make your money work and grow for you! The easiest and best longer term option is to pick a broad based S&P index fund from Vanguard or Fidelity.
4. If you own a home, use the refund to make an accelerated or larger home loan payment. Making just one extra monthly payment a year on a 30yr loan can reduce the loan term by up to 7 years saving you a lot in mortgage interest
5. Finally and by no means the least, give the refund to charity if you can truly do without it. Helping others is a grand gesture and if you can afford to do it.
As tax refunds roll in, financial planning is more important than ever. Make sure to use yours wisely! 💰💡
What are you planning to do with your tax refund? Drop a comment below! 🚀
Is the date the IRS gives you for receieving your refund the actual day you will get it? Can you get it earlier?
It is a gudieline, but normally pretty accurate. It may differ by a day here or there depending on your bank and funds clearing process. Normally you cannot request it earlier – just file sooner rather than later.
With CD and savings account rates at their current low levels, it is less foolish than it used to be to let the IRS force you to save by having too much withholding. It is better than not saving anything.
If you’re getting a refund. Put it in your savings account so next time you won’t need a dam stimulus check too survive and pay the bills.