Tax Experts Reveal the Worst Ways To Spend a Tax Refund
The annual income tax filing deadline has come and gone, but depending on when you filed and due to IRS delays, you might still be anxiously awaiting your tax refund.
If you’re planning to stash your refund in a savings account once it arrives, you’re in good company. According to a LendingTree survey, 46% of American consumers are planning to do the same, up from 40% in 2020 and 41% in 2021.
While saving is a financially prudent option for a tax refund, there are plenty of alternatives that aren’t. Here are the five worst ways to spend a tax refund, according to the experts.
Making Random Purchases
When your tax refund finds its way to the same bank account you use to pay bills and make day-to-day purchases, it can get lost in the shuffle instead of saved or invested.
“One of the worst ways that you can unwittingly dwindle away your tax refund is by dipping into the cash if it’s easily accessible; for example, when the cash has been refunded to the same bank account as your other money,” said Yvonne Cooper, head of finance and chartered accountant for Access2Funding.
“This enables you to access and spend the cash at any point unless you have a strong discipline not to.”
Buying Expensive Items That Are ‘on Sale’
“Retailers want to take advantage of people who receive big checks from the IRS,” said Sean DiMercurio, a certified public accountant and partner and founder of DiMercurio Advisors.
“To get you to splurge, they’ll put some of their most expensive items on sale — like electronics. This is one of the worst ways to spend your refund because the people that receive the biggest refunds are the people who don’t make a ton of money to begin with. If you are looking to make big purchases on electronics or other expensive items, just opt for less expensive brands or wait until you can afford it.”
Paying Down Accumulated Credit Card Debt
While using your tax refund to pay down debt could be wise; it’s not wise to avoid paying your credit card bill because you’re waiting on your tax refund to arrive.
“Some people wait on their tax refund just to pay off their credit card debt,” said DiMercurio. “This isn’t a smart way to spend your tax refund because you’re deliberately digging yourself deeper in debt. While you wait on your refund, your interest is piling up … start paying off your credit card debt with what you have. Chipping away at it is better than letting it sit there until the IRS writes you a check, which could be delayed by months.”
Investing in Things You’ll Never Follow Through on
“As a CPA for small business owners, I see many people spending their refund on things they think will make them money in the future but really won’t,” DiMercurio said.
“For example, they might use it to pay for a professional course or conference. You could use those skills to help you make money, but that’s dependent on you using those tools and resources. Don’t fall into the trap of spending money on development and expecting money to roll in immediately after. There’s nothing inherently wrong with that type of purchase, but you do have to put in the work to make it worth it.”
Investing in Things You Can’t Afford To Keep Paying for
According to Darren Veerapa, CPA and founder of Mr. Tax Guy, buying a boat without considering the expense of the ongoing maintenance or enrolling your children in a private school without considering the actual costs of their entire stay at the school are poor choices for a tax refund.
If you’re waiting on a tax refund to allow you to invest in something that you can’t afford to keep paying for, it’s a bad move. If you can’t afford the ongoing expense before the tax refund, you likely won’t be able to afford it after either.
How To Better Spend a Tax Refund
“Instead of using your tax refund on things that you won’t get you a return on your investment, the best ways to use them are starting a business or side gig — or making tax-deductible retirement contributions,” said DiMercurio.
“Starting a business or side hustle takes money upfront. Your tax refund is the perfect opportunity to cover those costs. You might even have to spend more than just your tax refund. But if you spend both your time and money wisely, you’ll get your tax refund back and a lot more in the long run. One of your goals should ultimately be to make enough money that you won’t get a tax refund in the future.”
DiMercurio concludes, “Putting your tax refund into a retirement account is a great way to spend it, especially a traditional IRA account, because your contributions may be tax-deductible. That saves you money right away. Your traditional IRA also grows tax-free, which means you won’t pay taxes on it until you withdraw it.”
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