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What Should I do with my Tax Refund?

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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 10 November 2016
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When people get a tax refund, they tend to average receiving back slightly over $2000 US Dollars (USD). Of course this is an overall average, and some receive more, while others receive quite a bit less. When you are lucky enough to receive money back, there’s always a question of what to do with it. Should you spend it or save it, invest it or splurge?

The first thing you should probably do if you know you’re going to receive a tax refund is to change your withholding status. A lot of people look at the money they receive back as a “savings” plan. Do note that you aren’t getting any interest on those savings when the government owes you money. If you’re worried that you might then withhold too little, drop the extra money you’re now making on your paycheck into a savings account that you don’t touch. It will earn a little interest, and if you do end up owing a bit on taxes, you have money saved to pay for it.

As for what to do with this year’s tax refund, plenty of people have advice on how you should treat this money. If you have healthy savings accounts and no debt, you might want to splurge. Maybe the refund gets you a brand new TV, furniture you’ve always wanted, or a boost to your vacation savings.

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On the other hand, if you do have debt, especially on high interest credit cards, a tax refund could repay some or all of that debt, and it will still be saving you money. You could avoid paying interest if you owe a couple thousand USD on a credit card. Another good thing to consider paying off is your car. Even if your tax return doesn’t completely pay your car loan, it can reduce the amount of interest you’ll pay, and give you more equity in your car. Make sure you mark such repayments as paid to the principal, so they are only used to pay for equity in the car.

If you have little in the way of savings, a tax refund can give you the means to start a savings or money market account. This puts your money to work for you, and provides you with backup funds should you need them. Most people, though, want to spend a little of their return, and that is okay too.

One suggested plan is to commit half of your tax refund to savings and half to special purchases, as long as you don’t have outstanding debts that really need to be paid. Even half of $2000 USD gives you a considerable amount to spend on something fun, something special, or something meaningful. Meanwhile, you’re also adding to savings, money market, or investment accounts, which will benefit you in the future.

While numerous suggestions exist, most important is understanding that a tax refund tends to mean you are not taking enough deductions. Unless your work circumstances change and you’re now in a higher tax bracket, taking a few more deductions can give you access to that money immediately. Then it’s up to you to use your willpower and place that extra amount in savings so it does “work for you.”

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cafe41
Post 3

@SauteePan - I think that is a really nice idea. I also think that depending on the size of the tax refund check you could do some minor home improvement projects too. You could paint your home or change the carpeting.

You could also make small cosmetic changes to your bathroom. I was able to remodel the bathroom and a half in my condo for about $3,500. I also was able to buy some marble tile that was heavily discounted and new sinks with a new shower curtain door for about $750.

The nice thing about this is that I can enjoy my home improvement project for years to come and will probably be able to recoup some of that money if I ever sell because bathrooms and kitchens are supposed to be the areas in the home that most buyers are interested in.

SauteePan
Post 2

@Latte31 - I think that you could also give a portion of your tax refund check to charity. I know that I always feel good when I give to others. I think that I sometimes get more out of it then the charity does.

Also, many charities have formal events with all sorts of auctions that make it a lot of fun. If you spend money on tickets like this you could have a good time and give to a worthy cause.

latte31
Post 1

I used to get so excited with my tax return refund until I changed my withholding status and now I usually pay a small amount. I think if you are getting a tax refund you probably already have the money spent, but I would put it in the bank until I could decide what to do with it.

I think that when you consider impulse purchases with this money you will probably spend it all and then you will regret it. If you have a cooling off period of a week or so, and you still want to buy the item that you saw in the store then you should probably buy it.

However, if you forgot about the item then it was just an impulse and you are better off without it.

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