Jeff Clark, CFP®
Last year the IRS processed roughly 150 million tax returns, giving refunds to 73% of filers. The average tax refund in 2016 was $2,857! That’s a nice chunk of change to receive in a lump sum and can feel very exciting. (1)
If you are eagerly anticipating your refund the best way to track it is through the IRS’ “Where’s My Refund” online tool. The IRS reports that refunds should be delivered within 21 days of receipt of a return. While you wait, making a plan for your refund can help you manage the windfall wisely.
Americans Plan to Save, Pay Down Debt
Wondering what to do with all that money? A survey from GoBankingRates can give you a comparison point from your fellow Americans. Respondents were asked, “What do you plan on doing with your tax return?” and elected one of the following seven options:
- Pay off debt (loans, credit cards, etc.)
- Splurge on a purchase (TV, shoes, etc.)
- Put the money toward a vacation
- Put the money in savings
- Make a major purchase (car, home, etc.)
- I do not receive a tax refund
- None of the above
21 percent of respondents did not expect to receive a refund. 32 percent of respondents did not know what they would do. But the other half planned to use the money as follows:
Of those who expect to receive a refund, over 40 percent plan to stash the money in savings. The next most popular option is paying off debt. Debt reduction is a smart plan, especially for those with high interest credit cards. Though most Americans are looking to improve their financial situation with the refund, around 20 percent are looking to have fun with the money by either splurging on a purchase, taking a vacation, or making a major purchase.
Six Smart Choices For Your Refund
If you’re still unsure of how to use the tax refund, here are six smart options to consider (packaged in a handy acronym) courtesy of the New York State Department of Revenue:
- Repairs and home improvements – Consider building a new deck or investing in the kitchen remodel you’ve always coveted. Even small changes could improve your experience at home, and larger projects may add value.
- Education – To earn a promotion or switch career paths, you often need additional training and education. You could put your tax refund toward college courses, continuing education, or vocational training.
- Fund for emergencies – Unexpected emergencies happen and are often expensive. Financial experts suggest planning ahead by having three to six months’ worth of savings to cover your fixed expenses, including mortgage or rent, utilities, food, and insurance.
- Upcoming expenses – If you expect to make a major purchase in the coming months, such as a new appliance or car, consider using your tax refund as a down payment to reduce or eliminate monthly bills.
- Nest egg for retirement savings – The sooner you start saving for retirement, the more time your money has to grow. If you have not maxed out an IRA (Individual Retirement Account) for 2016, you can apply some or all of your refund to the $5,500 limit until April 15th, 2017.
- Debt – Paying off credit cards or other debt today eliminates future interest charges.