It’s that time of the year again, when millions of people start to think about how they will spend their tax refunds. Some taxpayers plan to reward themselves with a vacation or shopping spree, but a surprising majority of Americans say they will use their refunds to improve their financial situations. Are you one of them?
Most taxpayers receive a refund from Uncle Sam. According to a new survey from Bankrate.com, 51% of Americans expect to get a refund this year or have already received one. Only 26% say they will owe taxes. Most refunds are worth significant amounts. In late February, the IRS reported that it had already sent $125 billion in refunds to Americans, with the average check totaling $3,120. In fact, the average tax refund has equalled roughly $3,000 since 2008.
Let’s take a look at how Americans are best spending their tax refunds this year.
1. Paying down debt
Americans are not strangers to debt. The Federal Reserve finds that household debt increased $117 billion quarter-over-quarter to $11.83 trillion at the end of 2014. Household debt has now increased in five of the past six quarters. Over the past year, total debt increased $326 billion, led by mortgages and student loans.
This year, 34% of respondents in the Bankrate survey say they will use their tax refunds to pay down debt, up from 30% five years ago. “People are still very, very nervous about the future,” explains Tim Gagnon, a tax attorney and accounting faculty member at Northeastern University in Boston, to Bankrate.com. “They had to take on more debt and see a refund as an opportunity to get some of it down so they won’t be so leveraged.”
2. Planning for the future
The bull market in American stocks may finally be capturing Main Street’s attention. Thirty-three percent of respondents say they will save or invest their tax refunds, compared to 28% in 2008, shortly after the Great Recession officially started.
On the surface, receiving money from the government can be quite satisfying. However, you should bear in mind that you are simply receiving your own money back, which you conveniently loaned to the government for free over the past year. Based on the average tax refund, that is about $250 per month you could have received in each paycheck and used for savings or investment.
Even placing this extra money aside in a savings account barely yielding anything is going to beat the zero percent interest Uncle Sam is offering — plus, it will be accessible when you need it. If you’re afraid of spending the extra money, set up automatic deposits into a savings account. Your tax liability can fluctuate every year depending on numerous factors, but if you are consistently receiving high refunds, it may be time to adjust your withholdings by providing your employer with a new Form W-4.
3. Purchasing necessities
The consistent rise in the cost of living has many taxpayers using their refunds on necessities. Bankrate finds that 26% of respondents will spend their tax refunds on items such as groceries and utilities. Only 3% plan to spend their refunds on vacations or shopping sprees.
Food is a common sore spot for budgets. A report last year from the Principal Financial Group finds that food costs are the most common area where Americans break the budget. Twenty-two percent of respondents say they went over budget on dining-out expenses in the fourth quarter, followed by 18% who spent more than planned on grocery bills. In 2013, the Bureau of Labor Statistics estimates that the average American household spent $6,602 on food.
“Retailers will be dismayed to learn that only 3% of taxpayers plan to splurge with their tax refunds. Overall, taxpayers this year are a bit more conservative with their refunds than they were when surveyed five years ago,” explains Bankrate.
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