34% of Americans Plan to Use Their Tax Refunds Immediately. Should You?
- Recent data reveals that one-third of tax refund recipients plan to use that money right away.
- In some cases, spending that money immediately is absolutely necessary.
Here's how to manage that lump sum of money.
In a recent survey by Jackson Hewitt, 34% of respondents say they used or plan to use their tax refunds right away. But should you do the same? Or should you sock that money away for a rainy day?
You may need to use that money immediately
Jackson Hewitt recently found that only 23% of tax filers plan to save their refunds. But given how living costs are soaring, that's not exactly shocking.
As Mark Steber, Chief Tax Information Officer at Jackson Hewitt, explains, "Historically, we've always seen a great deal of taxpayers use their refund immediately and on things they need ... Three out of four taxpayers receive a refund every year and they plan on it."
Of course, that begs the question -- is counting on a refund a bad thing? Steber insists that it isn't given that some people consistently get a refund year after year and use that money for essential items. And this year, with living costs being up, filers can use their refunds to catch up on bills or cover upcoming expenses. They can also use that money to pay for important expenses they may have previously put off, like car or home repairs.
Should you try to save your tax refund?
If you're in a position where you're able to stretch your paycheck to cover your bills, then it pays to save your refund. You never know when a financial emergency might strike, and without money in savings, you might struggle to cover an unplanned bill.
However, if you need your refund to cover near-term living expenses, then it pays to spend that cash rather than rack up costly debt. As Steber puts it, "We do know that Americans are using that refund for items they need and not something frivolous. In fact, according to a recent survey, only 5% of people are planning to use it for entertainment."
Should you expect a refund every year?
Tax refunds aren't guaranteed -- that's the danger of banking on them heavily. But those who consistently get one might continue to expect one, and Steber says that's not necessarily a bad thing.
The key, however, is to recognize the factors that might lead to a lower tax refund or no refund at all. Earning a lot of money from a side job and not paying taxes on it along the way, for example, could result in a smaller refund during tax season or even a tax debt.
Tax deductions and credits also play a big role in determining what filers' refunds look like. That's why it's important to make sure you're getting all of the tax breaks you're entitled to.
Today's tax software can certainly help point you in the right direction. But if you have a year when your refund shrinks or goes away and you're not sure why, it could pay to consult with a tax professional to get to the bottom of things and plan accordingly for the following year.
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