Here’s How Americans Are Planning To Spend Their Tax Refunds in 2023
Tax season is officially in full swing. The Internal Revenue Service began accepting and processing 2022 tax year returns on Jan. 23, and many early filers already have received their refunds.
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As of Feb. 10, the IRS had issued 13.34 million refunds totaling $26.65 billion. The average refund is $1,997, meaning millions of Americans have some extra cash on hand right now.
If you haven’t done your taxes yet, don’t panic. The deadline to file isn’t until April 18.
Regardless, if you’re expecting a refund, you’re probably feeling pretty excited. No matter what you do with the money, receiving an extra influx of cash is always nice.
Curious about what other people are doing with their tax refunds? GOBankingRates recently conducted a survey to find out. Here’s what respondents had to say.
People Are Saving and Paying Bills
|Put it in savings||25.75%|
|Pay off debt||19.66%|
|I do not expect to receive a refund||15.37%|
Clearly, most people plan to be financially savvy with their money, which was noted by Faron Daugs, CFP, wealth advisor, founder & CEO at Harrison Wallace Financial Group, based in Libertyville, Illinois.
“Overall, I’m fairly happy with the results of the survey,” he said. “To know that individuals are focused on increasing their savings that may have been recently depleted due to higher inflation, keep up with their bills or paying off high-interest debt is encouraging for 2023 — and [they] are all very good financial choices for their refund.”
When it comes to the best ways to use a tax refund, he said putting it in savings, paying bills and paying off debt — the top three choices highlighted by the GOBankingRates survey — are very good moves for your financial future.
Take Our Poll: What Do You Plan To Use Your Tax Refund For?
More Good Moves
Wanda Bowman, author of “The Financial Glow Up,” said your refund should go toward credit cards before saving.
She noted that a basic savings account can yield anywhere from 1.5% to 3% interest, while the average credit card interest rate is around 21%. Additionally, she said the recent average yield on a balanced 401(k) plan — 60% stock, 40% debt/cash — is about 8% to 10%.
“If you are in serious credit card debt,” she said, “use the tax refund to pay down the debt, because only earning 1% to 3% in interest on a savings account when you are paying 21% each month on credit card debt is not a good use of your money.”
On the other hand, if you haven’t accumulated serious credit card debt, she suggested using your tax refund to set up an emergency fund with three months of expenses. If you already have one in place, she recommended investing in real estate, an index fund or retirement plan.
“Remember,” she said, “the objective in life is to be financially independent so that you can live your best life without worries of financial hardships with confidence and security.”
Each To Their Own
Ultimately, there isn’t really a right or wrong way to spend your tax refund. The best choice will be something different for everyone.
For example, results of the GOBankingRates survey revealed 6% of people plan to treat themselves with their tax refund, while 4% plan to put the money toward travel.
While exponentially more people — 26% — plan to save, it’s not necessarily wrong to spend it. If you’re not in debt and have a healthy amount of savings, you might feel comfortable simply enjoying what can feel like an annual “bonus” from the IRS.
Ensure you don’t make a decision you regret by taking time to think about what you want to do with your tax refund this year. Choose the option that makes the most sense for your financial situation and goals for the year.
Reduce Your Refund Next Year
Meanwhile, Daugs said you might want to make changes for next year.
“If you are getting a significant refund, it may be time to reassess your withholdings and align them with what your expected tax bill will be without risk of penalty,” he said. “You can then use those ‘extra’ dollars that were being withheld to put away in savings and/or investments where you can possibly earn some interest.”
He acknowledged that many people use their tax overpayments as sort of forced ways to save for short-term financial goals, such as vacations or new furniture.
“This is not a great strategy,” he said, “as you are providing the government with an interest-free loan, which is of no benefit to you. Ideally, I like to have my clients as close to zero [as possible] on tax day, meaning they don’t get a refund but they don’t owe a lot either.”
He said this strategy helps maximize cash flow throughout the year, without incurring a large tax liability.
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