The only fun part about filing taxes is the refund. Many Americans look forward to that extra cash all year. According to a recent GOBankingRates survey of 1,000 Americans across the country, 84.9% of tax filers are anticipating a refund this year, with 15.8% of them expecting more than $3,000.
This extra chunk of change is especially appreciated during what has been a somewhat unpredictable time for the economy. GOBankingRates Lead Content Data Researcher Andrew Murray said Americans are feeling optimistic about their tax refund despite new factors around the pandemic that might have affected it.
“In a year where more people are uncertain about how stimulus checks and the child tax credit will affect their taxes, a good chunk of the public still expect to see a sizable tax return,” Murray said. Due to these unprecedented times, however, it’s important to use your tax refund wisely.
Here’s what tax experts recommend doing with your refund.
Put It in Savings
Most Americans in the recent GOBankingRates Tax Survey said they’re going to put their tax refund in savings. According to the survey, 44.6% said they’re going to hold onto their refund, and that’s music to financial experts’ ears. Richard Lavina, who is a CPA and the CEO and Co-Founder of Taxfyle, said he recommends putting your refund into your emergency fund.
“If the COVID-19 pandemic has taught us anything, it’s that money can become sparse at a moment’s notice. Sometimes, a tax refund could make a tremendous difference,” Lavina said. Even putting away half of your refund into savings can accrue interest and put you financially ahead of where you were before you filed.
Pay Down Debt
If you have debt, your tax refund can help you chip away at it or eliminate it all together. According to GOBankingRates’ Tax Survey, 37.4% of Americans plan on using their refund to pay off some sort of debt, and CPA Wendy Barlin says this is a great choice. Barlin said that if you have debt, it’s good to take a hybrid approach: “I recommend putting half into savings and using half to pay down debt.” This way you can still put some money away while raising your credit score.
Looking to make more money out of your refund? Think about investing it. This is what 15.4% of respondents in GOBankingRates’ Tax Survey said they were going to do with their refund. However, make sure you make smart investments or ask a professional before you commit. Mark Puzdrak, CPA, said it’s not worth investing unless you’re 100% sure of what you’re doing. “Investing in something you know nothing about or making an investment that you are unsure about [is the worst thing you can do with your refund]. It’s your money, and your money should be put to good use,” Puzdrak said.
If you’re new to investing, consider a robo-advisor like Betterment, which is an app that automates your investments based on your risk tolerance. You’ll have access to resources to learn more about investment and won’t have to worry about making big mistakes that can cost you early on. Investing can also mean putting money into your 401K. Whether it’s through your job or not, the more you can put in now, the more time the money has to grow.
Try To Resist Treating Yourself
It might seem extremely appealing to take this extra cash and immediately buy something for yourself. After all, you have the money, so it’s not like you’re going into debt. However, experts caution that blowing all your money on a luxury or frivolous purchase squanders the opportunity to make your money work for you and grow into even more money. Lavina recommended if possible to use your tax refund on something that helps your future. “It’s not effective to use tax refunds to splurge on luxury items and goods. Putting the money somewhere safe that allows the funds to grow appropriately is a better long-term solution than spending the money at once.”
A nice compromise might be to take you and your family out to a nice dinner when the check comes in, but put the rest of the money into something that will serve you in the long-run, so you get the best of both worlds.
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Methodology: GOBankingRates surveyed 1,000 Americans aged 18 and older from across the country between January 31 and February 1, 2021, asking six 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? (Select all that apply); (5) Do you feel confident you are receiving all the deductions you feel qualified for?; and (6) If you received the Child Tax Credit this past year (2021) how do you feel it will affect your taxes? All respondents had to pass a screener question of: Do you plan to file taxes in 2022?, with an answer of “Yes”. GOBankingRates used PureSpectrum’s survey platform to conduct the poll.