The IRS reports that the average tax refund for this year exceeds $3,300. However, financial experts caution that this may mean you are essentially giving the government an interest-free loan. With the deadline of April 15 approaching in less than a month, there is still time for you to file your tax return for this year. The good news is that you might be eligible for a higher refund than anticipated.
This year’s average tax refund stands at $3,324, marking a 5.7% increase from last year’s figure of $3,145, as reported by the IRS. This increase comes as a relief for many Americans who are feeling the financial strain caused by inflation, debt, and economic uncertainty. A significant portion of Americans, including those with six-figure incomes, live paycheck to paycheck.
Nevertheless, receiving a sizable tax refund should not immediately translate to indulging in luxury expenses like a vacation or home renovation. According to Jere Doyle, an estate-planning strategist at BNY Wealth, a large tax refund might actually be a red flag. He explains that using tax refunds as an investment strategy is counterproductive and akin to providing the government with an interest-free loan.
Ashley Weeks, a wealth strategist at TD Wealth, echoes this sentiment by cautioning against viewing a tax refund as “free money.” Relying on credit card debt to compensate for withheld income can lead to further financial stress for many Americans. Data from TaxSlayer indicates that a majority of Americans plan to allocate their tax refund towards essential needs such as rent, groceries, and paying off credit card debt.
For individuals receiving a tax refund, there are strategies to leverage these funds for long-term financial stability. Establishing an emergency fund is crucial, especially since a significant number of Americans lack a safety net for unexpected expenses. Financial advisor Roberta Fitzgerald suggests having three to six months’ worth of expenses saved in a readily accessible account, like a high-yield savings account, to cover unforeseen costs such as home repairs, medical emergencies, or temporary job loss.
Prepare for unexpected challenges in life by maintaining financial stability, advises the expert. Once you have set up an emergency fund, consider using your tax refund to tackle debts such as credit card balances or car loans, prioritizing high-interest consumer debt. Rather than splurging on something fun, investing your tax refund can lead to both short- and long-term gains. Opt for growth-oriented investments like mutual funds to take advantage of lower long-term capital gain tax rates. By staying invested and avoiding market timing, you can potentially grow your money significantly over time. Additionally, consider boosting contributions to retirement savings accounts or making extra payments on mortgages or student loans to reduce interest payments. Investing in personal development, such as taking classes or pursuing a new hobby, can also be a wise use of extra funds.
