Most of us hate the hassle of filing our taxes, but we love to get a tax refund. Approximately 75% of Americans got a tax refund in 2022 and the average refund was $4,123 for Texas residents!*
What’s wrong with a big tax refund?
There’s nothing wrong with getting a large refund but it does mean that you overpaid your taxes during the year. The IRS is just returning that overpayment to you without interest! Receiving a refund might be a good thing if it keeps you from squandering the money away during the year AND if you put your refund to good use when you get it.
A refund is neither found money nor free money. It’s your own hard-earned cash that was on loan to the government! You could have used the money toward investments or other money-making efforts if it had been paid out to you as income when you earned it rather than withheld from your payroll.
What to Change
If you would prefer to come closer to “breaking even” on your tax bill, you can adjust your withholding at any time by submitting a new Form W-4 to your employer.
Your withholding is a way to predict your tax liability for the year in advance. If you have any major life events such as getting married and/or having children, it’s always a good idea to review your withholding and adjust as needed.
The IRS provides a useful online tool that can help you get it right and it takes into consideration any tax credits you think you might be eligible for.
Good Uses for Your Refund
If you are expecting a big refund, before heading to the mall or booking your next vacation, think about these options, in order of importance, to put your money to good use.
- Pay down high-rate debt. If you are carrying a balance with high-interest rates on credit cards or loans, it’s a good idea to use the refund to pay down the debt. We know this isn’t the most exciting way to use your return but it can save you hundreds of dollars in interest.
- Invest in your future. Put your tax refund into a retirement savings account such as an IRA or 401(k). This can give a nice boost to your earnings and overall returns.
- Cushion your emergency fund. If you don’t have at least 3-6 months’ worth of salary saved, you may want to put your refund into your emergency savings fund.
- Pay for a need. Maybe you’ve been putting off buying a new refrigerator, making a needed home repair, or getting new tires for your car. These are excellent examples of “needs” that can be covered fully or in part with your tax refund.
- Have some fun. The recommendations above should take priority but it’s also important to do a little something for yourself. A good rule of thumb is to spend about 10% of your tax refund on something that you enjoy. Maybe that’s eating out at your favorite restaurant, getting a new outfit, or booking a pedicure.
Deciding what to do with your refund depends on your financial situation and your future goals. If you have questions, Members Trust is ready to help. Contact us for answers.