I’m a Tax Expert: 3 Worst Things I See People Do With Their Tax Refunds
Written by
Josephine Nesbit
Edited by
Jenna Klaverweiden
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You can put your tax refund toward anything you want — but that doesn’t mean you should.
The sudden influx of cash may seem like a reward, but it’s typically a reimbursement for an overpayment of federal or state taxes during the year. That’s extra money that you could have kept in your wallet or put to better use throughout the year.
However, many people treat their refund like free money and make choices they later regret.
Here are three of the worst things people do with their tax refund, according to tax experts.
Luxury Purchases
“Many have spent their tax refund on luxury purchases — as though their refund was some kind of small lottery win or something,” said Logan Allec, CPA, owner of tax relief company Choice Tax Relief.
This can be anything from designer clothes to expensive gadgets. Allec explained this is not an appropriate way to think about tax refunds.
“Apart from being the recipient of certain refundable credits, the most common way that a taxpayer receives a tax refund upon filing their return is because they had too much in taxes taken out of their paychecks throughout the year — that is, their income tax withholdings were more than what they would actually owe in taxes,” Allec said. “This difference is their tax refund.”
A New Car
It may be tempting to use the money as a down payment on a car. But if you can’t afford the car, it’s not a good idea.
“Using a refund as a down payment on a car with unaffordable monthly payments can lead to financial strain,” John Adams, CPA, firm owner and tax planning and fractional CFO expert at Bridgewater Tax and Financial Consulting, wrote in an email.
Expensive Vacations
It’s fun to splurge on expensive vacations once in a while, but it’s not always a good idea — especially if there are other financial obligations you should tackle first.
“While vacations are great, spending an entire refund on a short-lived trip without considering savings or debt repayment can be a bad move,” Adams explained.
What To Do Instead
A better way to use your tax refund is to put money in an emergency fund and pay off high-interest credit card debt.
“Shore up your emergency funds and aim to have at least six months of savings in a savings account,” Adams said. “Review your credit card debt and try to pay off the balances with the highest interest rates.”
Adams also recommended investing in your retirement and education. “Invest in courses that will build your skills and lead to higher income earning potential in the future,” he said.
What you should do with your tax return also depends on your budget.
“A better way to think about your tax refund is to simply allocate your refund according to your budget — as though you had the money throughout the year as additional take-home pay,” Allec explained. “So if you typically allocate 10% of your monthly take-home pay to ‘treating yourself,’ feel free to do that. But if you typically allocate 20% of your monthly take-home pay to retirement and investments, I’d suggest you strongly consider doing at least the same for your tax refund.”
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