Americans often look forward to tax season because many will receive a check for essentially doing nothing. Tax refunds are known to stimulate the economy slightly due to the increase in spending money. A large tax refund simply means you gave too much money to the government throughout the year. This money is just an overestimation of how much tax you should’ve paid on your income, so in the grand scheme of things, you aren’t actually making a profit.
“If your tax refund is low, it just means you didn’t pay too much in taxes.”
Regardless, you only get a tax refund if you can prove that you paid too much in tax during the last year. For regularly employed workers, this isn’t too hard thanks to the W-2 your employer mails you at the beginning of every year. For other workers with more complicated tax situations, however, it can be a real project. If you’re lucky enough to get a tax refund this year, there are some smarter ways to spend it.
Where’s your refund?
If you’ve filed your taxes already and are looking for your refund check, you may not have to wait as long as you did last year. According to Kelly Phillips Erb of Forbes, the IRS has said it will be issuing 90 percent of all refunds within 21 days of receiving the tax return. After filing, you can check out the IRS tool “Where’s My Refund?” online or in the form of a mobile app. Filing electronically is faster in every way; your return will show up within 24 hours on “Where’s My Refund,” and you can receive funds faster through direct deposit into your bank. Paper filing takes longer to process and to receive your refund, so take that into consideration when choosing which method you prefer.
Erb noted that calling the IRS is not the best course of action. Due to the large volume of calls during tax season, getting an actual human on the phone is difficult. Even if you do manage this feat, they can’t tell you anything more than the online tool. Only call the IRS if it’s been longer than 21 days since you filed electronically and you still haven’t gotten a check.
Last year, the IRS reported that the average tax refund was $3,539. That’s pretty decent, especially considering many Americans are finding it difficult to escape from the paycheck-to-paycheck lifestyle. A survey from Bankrate recently revealed that 63 percent of Americans wouldn’t be able to handle a surprise emergency expense like a $500 car repair bill or $1,000 for a trip to the emergency room. That’s why Bankrate’s first suggestion for how to spend that refund check was to not spend it. Park the money in a liquid savings account and use it to begin to save at least three months of basic expenses. Remember how one of those New Years resolutions was to save more money? This is your chance to do it. Put that cash towards protecting yourself from sudden job loss, medical emergencies, or any other unexpected expense
Reduce debt and other options
Along this same line of thought, you could also use your refund to reduce debt from credit cards or installment loans. Debt can make for a big burden when you’re trying to save or just live within your means. Investing in other long-term savings is also a good idea. One example is a home energy audit, which according to Bankrate can save hundreds of dollars on excessive heating and cooling costs over several years. You might also consider paying yourself back in other ways. Maybe you’ve always wanted to take a class in something that interests you or teaches you a useful, or even marketable skill. A tax refund would be the perfect impetus to see this through.
Resist the urge to immediately spend your tax refund on nonessential items. Build up emergency funds, other savings, or pay off debt. By preparing for the future or getting out of debt, this extra income can go far. Analyze what part of your life has the highest need, and allocate these funds there.
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