It’s estimated that more than 110 million Americans, or roughly two-thirds of all taxpayers, received a tax refund from the IRS in 2019, with the average check coming in around $3,000.
Now, it should go without saying that your goal when filing your taxes is to come as close to breaking even as possible. If you owe the IRS, it just means that you didn’t withhold enough in taxes throughout the year, and if you’re due a refund it means that you withheld too much and essentially gave the government an interest-free loan.
However, as you can tell from the stat above, most Americans are content issuing the government an interest-free loan. And rather than make adjustments to their withholding, some taxpayers even come to bank on getting a sizable refund that they can put toward home improvement projects, guilty pleasure splurges or other expenses. While it can be tempting to take your refund and use it all on a lavish purchase, there are smarter, more responsible things that you can do with it.
In this post, we’ll take a look at 5 smart things you can do if you receive an income tax refund:
#1: Put it toward an IRA
Not only is saving for your future wise, but doing so can also offer you a tax benefit in the year that you’re filing for. For example, depending on your age, you’re permitted to invest up to $7,000 per year in your IRA. And if you’re able to put it into your IRA before the April 15 tax filing date, it’ll count toward your 2019 taxes — and that will help you even more.
#2: Pay Down High-interest Debt
Have credit card debt that you’re struggling to pay off? What about student loans? We strongly advise you take at least a portion of any income tax refund and put it toward any high-interest debt. Doing so will save you money in interest long term, and can even help improve your credit score.
#3: Simply Save All of It
It’s estimated that nearly half of all Americans wouldn’t be able to come up with $400 in the event of an emergency. Noting this, it can be wise to pad any rainy day or savings account with money that you receive back from the IRS.
#4: Set Aside for Christmas 2020
After Christmas 2019, it’s estimated that Americans took on an average of $1,325 in debt. Why not start saving for Christmas earlier this year so you’re not digging yourself out of a credit card debt hole after the holidays in 2020?
#5: Have Some Fun
We strongly encourage you to invest or save any tax refund you’re owed wisely, but we’d be remiss if we didn’t tell you to also set aside some of the money you’re due back for some fun. Take a vacation, put it toward a fun home improvement, or pick up the latest gadget you’ve had your eye on. It’s OK to have some fun with your refund.
