Smart Ways to Use Your Tax Refund

With just about a month left before the deadline for filing personal income tax returns, many people have already started receiving their tax refunds. For a great deal of Americans, filing an income tax return is the largest financial transaction they will engage in for the entire year. Receiving a tax refund check is often a major financial boon or lifesaver depending on how your personal finances are doing.

According to the IRS, the average federal tax refund is $3,120 and does not include any state tax refunds you may receive. Since tax time is often the only time many people receive a one-time cash injection of that size, many stores offer “Tax Day” sales and it can be tempting to book that dream vacation or upgrade all of your electronics when you don’t really need to just yet. As your trusted tax and financial advisors, here are some smart ways that we recommend using your tax refund this year.

1. Pay off debt.

Per TIME magazine, this is actually what a majority (42%) of taxpayers do once they receive their tax refunds: pay off debt.

Debt becomes easier to manage and eventually eradicate if you can make a massive payment that is mostly principal and not interest. Given the average federal tax refund size, a payment around $3,000 can put a sizable dent in credit card debt or outstanding student loans. Getting rid of debt should be a priority so that you are free to save money and build wealth once you are no longer beholden to lenders and credit card issuers.

If you have a mortgage, an extra $3,000 or even more per year can put you on a path to having a fully paid off home much earlier than you anticipated.

2. Put your refund into a savings and investment plan.

About 40% of taxpayers interviewed by TIME allocated their tax refunds to savings accounts and investment plans. If you have little or no debt, building wealth becomes easier and should be a goal. If you’re unsure what types of investments are appropriate for your net worth, risk tolerance, age, family status, and other factors you should speak to a financial planner or registered investment adviser. It’s also easy to start with simply putting the money into your savings account and starting with low-risk options like certificates of deposit and index funds.

3. Contribute to – or open – a retirement account.

Open up that IRA you’ve been putting off, especially if you do not have access to a retirement plan through an employer. There are options online that are easy to use and with very low minimum investment thresholds so even if your tax refund needs to go towards necessities (26% of taxpayers report that paying day-to-day bills for necessities is how they will use their tax refunds), you can get started with a little cash for retirement.

4. Make that major purchase you’ve been saving for and putting off.

While going shopping or planning a luxurious vacation sounds nice, tax time is the ideal time to make those home improvements that will improve your home’s value and quality of life. If you need a major medical procedure done, this is also a good time to do it so you do not owe money to healthcare providers.

If your car is dying and you need to replace it out of necessity, putting your tax refund towards another vehicle can prevent you from having to take on a car note (or at least, taking on a much smaller car note.) Any appliances that are on their last legs? Use your tax refund to take advantage of those sales to pay for these necessities so you don’t have to put a new fridge on your credit card.

Rue & Associates is here to advise you on all taxation and personal finance matters year-round, no matter the size of your tax refund. If you’re unsure whether you should save, invest, pay down debt, or are unclear as to what your financial goals should be, we’re here to help. Please contact us to speak to one of our friendly and professional tax law experts.