This article was last updated on February 2
So you are lucky enough to get a tax refund. Congratulations. But before you think of this as an end-of-year bonus or money you can fritter away, realize it is actually just the money you already earned for the most part. Sure some of the refund may be due to a tax credit or other tax break you got, but for the most part tax refunds are just returning the money you overpaid to the IRS. So like your other earnings and savings be smart about this windfall. Also as some background here is how your refund compares to others, based on a research report form the American Tax & Financial Center at TurboTax. Highlights include:
- An estimated $200 billion in federal tax refunds will be issued this tax year to American taxpayers, fueling the U.S. economy and marking one of the biggest paydays of the year for the average U.S. family.
- Approximately 40% of taxpayers live paycheck-to-paycheck. The average refund last year was around $3,000 and equals more than a months’ worth of income for two-thirds of taxpayers or more than three months’ worth of groceries for a family of four.
- Where are tax refunds spent? With an average of $854 spent during the holidays and an average consumer credit card debt of $8,721, income tax refunds are a big source of funds to meet debt obligations. The average tax refund could cut almost a third of the average credit card debt.
- Only 25% of tax payers will save at least some of their tax refund.
- Approximately 84% of taxpayers that file on the earlier side (before Feb 15th) receive a refund, compared to just half of those filing in April.
When can I expect my tax refund? In most cases if you e-file (see recommended providers) and use direct deposit the IRS estimates that you should receive your federal refund between 8 and 21 days after they accept your return (i.e. the IRS does not send you a notification requesting additional information or an audit notice). If you did not select the electronic deposit option, getting a paper check mailed to you adds about a week.
If your return was filed by mail, then your refund can take up to 6 weeks from the date the IRS receives a complete and accurate return. Once your return is accepted by the IRS, the IRS processes your refund based on the IRS E-file Refund Cycle Chart. Exact refund dates are based on IRS processing times and can be found in IRS Publication 2043 and IRS Topic 152 for both e-filed and mailed returns.
So how should you spend and invest your tax refund?
Here are my top 5 ways to make the most of your refund:
1. Pay off high interest debt, like that on credit cards and personal loans
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 and open up a trading account with the refund monies. 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.
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.