Expert: What To Do With a Tax Refund of $3,000 or More

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According to the IRS, the average tax refund for 2022 is $2,933, as of Mar. 17 — and the agency has already refunded nearly 54 million overpayments. That’s almost an 85% increase over the number of refunds it issued by the same time last year.

While the average amount is sure to change as tax season progresses, it’s clear that millions of filers have joined the ranks of the early birds — but why the sudden urgency?

Maybe it’s because they’re expecting a windfall.

According to a new GOBankingRates study of more than 1,000 adults, 12% of taxpayers anticipate a refund greater than $3,000 — another 14% expect to get at least $2,000 back from Uncle Sam. 

If you’re among those waiting for a big direct deposit from the IRS, don’t spend it all in your mind just yet. A check for $2,000 or $3,000 can change your life — but only if you spend it wisely with a few of the following smart money moves. 

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APRs Are Over 24% — Your Credit Cards Need Some TLC

There aren’t many less-exhilarating ways to spend a big tax refund than by using it to pay down debt, but that’s exactly what one out of five people polled in the survey plan to do. 

“At today’s interest rates, averaging more than 20%, getting rid of credit card debt effectively generates a return of 20% annually,” said consumer finance and lending expert Kyle Enright, president of Achieve Lending

Consider the consequences of holding $3,000 in debt on a card that charges 18% interest, which is optimistic, considering Forbes reports the average APR is now above 24%.

“A standard minimum payment of 3% would be $90 per month,” Enright said. “Paying just that, which does decrease over time, will amount to $2,698.44 in interest and take almost 16 years to pay off. That means the item you bought will cost you almost double its purchase price. And, you won’t have the chance to invest that money and earn something on it.” 

High-Yield Savings Accounts Are Back — and You Need an Umbrella

If your credit cards are in good shape, the second-best thing you can do with a few thousand bucks is to save it for a rainy day — because if the last few years have proven anything, it’s that it can start pouring at any moment. 

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“The effects of the coronavirus and concerns about a recession have amplified why everyone needs a good emergency fund,” Enright said. “Unexpected events do happen. Emergencies do arise. In the past, some professionals have recommended three or six months of basic living expenses in the emergency fund. At least six to nine months is best. The reality is that more is better, yet even a small amount of emergency savings can be a lifesaver.” 

Without it, you’ll have to beat up your credit cards to survive the next crisis, which will land you right back where you started paying 24%.

People seem to sense the urgency. The largest group of the study’s respondents — more than 1 in 4 — plan to put their refunds into savings. 

Start Growing It for Your Future Self

If you have lots of toxic debt and no financial cushion, the best use for your refund is in the here and now. But if you’re comfortable, $2,000 or $3,000 invested now could grow into real money that could be waiting for you in the future when you need it most.

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“Add it to retirement savings in an individual or Roth IRA, 401(k) or another plan,” Enright said. “If the program is tax-deductible, you may be helping your tax situation next year, too.” 

Pretax contributions, like those you make to an IRA, are generally tax deductible. After-tax contributions to Roth accounts are not.

Either way, only about 8% of the study’s participants plan to invest their refunds, possibly because many need it for more immediate concerns — more than 20% will use their refunds to pay bills. 

Prevent Medical Bankruptcy With a New HSA

If you have a high-deductible health insurance policy, you might be eligible to put your $3,000 in a health savings account (HSA). If so, you’ll be sheltering your cash in one of the most flexible accounts available — one with a triple tax advantage that you can access both now and in retirement.

“Fund your health savings account fully if you have one,” Enright said. “Most contributions are tax-deductible, and withdrawals to pay qualifying medical expenses — at any time in life — are tax-free.”

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Spend Some of It on Something That Makes You Happy

About 10% of the people polled plan to use their refunds to travel or otherwise treat themselves — and if they can swing it, a little indulgence can be money well spent. But even if you can’t or don’t want to spend the whole thing on yourself, a small splurge can buy you some well-earned happiness — but the more philanthropic might get even greater joy from paying it forward.

“Donate to a charitable organization,” Enright said. “Even if it’s no longer tax-deductible for you, helping others is never a bad idea.”

More From GOBankingRates

Methodology: GOBankingRates surveyed 1,002 Americans aged 18 and older from across the country on between January 30 and February 1, 2023, asking fourteen different questions: (1) How do you plan on filing your taxes for this year?; (2) When do you expect to file your taxes this year?; (3) How much do you expect to receive in a tax refund?; (4) What do you plan to do with your refund?; (5) Do you feel confident you are receiving all the deductions you feel qualified for?; (6) Do you believe your tax dollars are being spent effectively?; (7) Do you believe you are paying too much, too little, or a fair share in taxes?; (8) Have you ever been audited before?; (9) Who will/would use your tax dollars the best?; (10) How much is the standard deduction for a single filer (and married filers) in 2023?; (11) What concerns you the most about Tax Day?; (12) Do you expect your tax refund this year to be more or less than last year?; (13) What do you understand the least about your taxes?; and (14) What would you rather be doing than your taxes? (Select all that apply). GOBankingRates used PureSpectrum’s survey platform to conduct the poll.

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