I’m a Tax Expert: This Is the Worst Mistake I’ve Seen Someone Make With a Refund
Written by
Jake Safane
Edited by
Chris Cluff
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Getting a tax refund can feel like winning free money. Every year, millions of Americans get refunds, many of which are worth thousands of dollars, and you can even get this money deposited right into your bank account.
In just five days to start the 2024 filing season, the IRS said it processed over 2.6 million direct deposit tax refunds, worth an average of $1,543 per refund. That’s down a bit dollar-wise from last year, but perhaps as the tax filing season continues the average will tick up.
Getting well over $1,000 deposited into your bank account can be tempting. But, just because you didn’t expect to get that cash doesn’t mean you should automatically treat it like something that’s burning a hole in your pocket. This is money that you overpaid and essentially lent to the government on an interest-free basis.
Once you get it back, you get a chance to decide how to best put that money to use, such as paying down debt or investing for your future. But some people use their tax refunds to spend frivolously, as Gary Watts, vice president at Wealth Enhancement Group, has seen.
A Trip to Vegas?
Watts, a CFP and financial advisor, has seen some clients make some big mistakes with their tax refunds, particularly when it comes to spending money on travel when there are more pressing financial matters — if not personal matters — at hand.
“I’m aware of at least one person who used their refund for a trip to Las Vegas instead of paying down their considerable credit card debt,” he said. “I suspected that they had gambling and other addiction problems. That was hard to see.”
The good news is that most people don’t make this type of mistake.
A recent GOBankingRates survey found that only around 4% of Americans would spend their tax refunds to “treat themselves” to a major purchase, and 2% would spend it on a vacation. Instead, many people use tax refunds for more pressing financial needs, such as building up savings or paying off debt.
Watts agrees that, if you’re in debt, a tax refund can be a golden opportunity to reduce that burden.
When it comes to using their tax refunds, “for most people, paying off credit card debt should be a top priority,” he said. “I consider credit card debt to be a financial cancer, and it has to be dealt with quickly and aggressively.”
By using your tax refund to pay down debt, you can save yourself more money in the long run, as you can avoid interest fees racking up. And that can help set you on a better financial path so you can save for trips you can actually afford.
Avoiding Administrative Errors
Spending mistakes aren’t the only types of problems people run into with tax refunds. Sometimes administrative issues cause refunds to get misplaced, delayed, underpaid, etc.
Watts said, “More than a few taxpayers have closed their bank account and moved because of a divorce, which caused their refund to be seriously delayed.”
Even if you haven’t had a big change like a divorce, you want to double-check that you include the right information in your tax filing to ensure prompt receipt of your tax refund.
“Taxpayers should make sure that their direct deposit information is up to date and correct on their 1040,” Watts said. “If the bank can’t deposit the refund into an open account, they will return it to the IRS. Then the IRS will mail the refund to the last address of record for the taxpayer, which could delay the refunds by up to 10 weeks.”
Another issue could be filing too early. You don’t want to file late, thereby potentially incurring penalties and delaying your refund; but, as the IRS itself points out, sometimes filing early, before you have all your tax documents, could lead to processing delays. You also might end up miscalculating how much of a refund you’re entitled to, without having the right tax forms to refer to.
Overall, it’s easy to get caught up in the excitement over tax refunds, but you don’t want to throw away this opportunity.
This is money that in many cases has been unintentionally saved for you. If you had the correct amount withheld each paycheck, maybe you would have had a little more take-home pay every month, but perhaps not enough to make a noticeable difference. Instead, that amount might have gotten swallowed up by your normal spending.
Now, when receiving your tax refund as a lump sum, you might have enough to reach big financial goals, like saving your first $1,000 for an emergency fund or paying off a credit card. That can be more valuable than the fleeting enjoyment of a purchase you can’t afford.
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