Americans Plan to Use Their Tax Refunds Responsibly This Year -- That Is, if They Get One

Though many tax filers have smart plans for their refunds, they shouldn't be banking on a windfall to get their finances in order.

Maurie Backman
Maurie Backman
Feb 14, 2019 at 6:04AM
Investment Planning

Each year, the majority of filers walk away with a refund during tax season. This year, however, we might see a smaller percentage of filers getting money back from the IRS.

The reason? Many workers saw more money in their paychecks throughout 2018 as a result of the massive tax overhaul that went into effect at the start of the year. As such, the money that many Americans would normally get back from the IRS during tax season was, in fact, already paid to them.

Still, there's a good chance a large number of workers will indeed see a refund this year, and no matter how large or small it is, they'll want to use it wisely. Thankfully, data from GOBankingRates indicates that a large chunk of tax filers intend to put that cash to good use. In fact, the No. 1 thing that tax filers plan to do with their refunds is pay off debt. Other smart, though less popular, choices include purchasing a major necessity, saving in a non-retirement account, investing, and building a nest egg. In fact, only 10% of tax filers plan to use their refunds frivolously -- 7% say they'd spend it on a vacation, while 3% would indulge in a luxury purchase.

An open red mailbox with a bunch of 100-dollar bills coming out of it

IMAGE SOURCE: GETTY IMAGES.

If you're getting a refund this year, you'd be wise not to blow it, especially if you have debt or are behind on savings. At the same time, don't count on that refund to get your finances in order, because you might find that for the first time in a long time, the IRS doesn't actually owe you a dime.

Don't bank on that refund

While it's encouraging to see that 27% of Americans plan to use their tax refunds to dig out of debt, the fact of the matter is that doing so shouldn't be dependent on a refund. Contrary to popular belief, tax refunds aren't free money. Rather, they're misplaced money, so to speak.

When you get a refund, it's because you paid the IRS too much money in taxes during the year, and for nothing in return. In fact, if you're currently in debt and anticipating a refund, the very source of that debt could be none other than the money that went missing from your paychecks so the government could hang on to it for longer.

Imagine you typically get a $3,000 refund, and are sitting on several thousand dollars in debt. Had that money been paid to you in the form of an extra $250 each month, you might've avoided that debt in the first place. Therefore, getting a smaller refund than usual -- or no refund at all -- is actually a good thing, because it means you managed to collect the money that was rightfully yours up front.

Of course, if you're counting on a refund to get out of debt and none comes in, that's certainly a far-from-ideal situation. And until you manage to get your tax return submitted, you won't actually know how much money to expect from the IRS this year. But know this -- generally speaking, you shouldn't count on a refund to pay off debt, save for emergencies, or fund a nest egg. Rather, you do a better job of budgeting so that you avoid debt and fund those goals in the first place.

Get a grip on your finances

No matter what your refund ultimately looks like this year, do yourself a favor and create a budget based on the amount of take-home pay you have to work with. See what you spend on necessities and non-essentials alike. Then, make changes as necessary so that you're able to cover all of your expenses without falling back on your credit cards, all the while socking a decent amount of cash away for emergencies and retirement.


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That said, if you do wind up with the usual multithousand-dollar refund you've come to expect this year, it pays to adjust your withholding so that you get more money in your paychecks going forward. In doing so, you'll lower your refund amount for the following year, but you're better off having instant access to your earnings than giving the government a free loan and increasing your chances of struggling financially because of it.