In 2018, the average tax refund was almost $2,900. According to a study conducted by J.P. Morgan Chase Institute, many people wait for their tax refund, so they can pay for medical expenses not covered by insurance. For example, close to one-third of people spent part of their tax refund at the dentist. Another 40% of medical spending from tax refunds went to chiropractors, optometrists, nursing service providers, and medical laboratories.
- Using your tax refund to save you money during the coming year is a smart move. Paying off high-interest credit cards frees up some cash in your monthly budget. Figure out which card has the highest interest rate and pay it off. You could use the monthly payment amount set aside in your budget to tackle the debt with the next-highest interest rate to eliminate that one fast, as well.
- Setting aside money in an emergency fund. This is a great time to tweak your budget a bit and make room for regular savings deposits if you don’t already. Even a few hundred dollars can take the edge off unexpected expenses.
- If your monthly bills are paid, you don’t have pressing medical needs, and you’ve paid down some high-interest debt and added to your emergency fund, then you can consider adding to your savings, investing, or even splurging on something you’ve been wanting.
Give Yourself a Raise
If your tax refund is several thousand dollars, it means you’ve overpaid taxes all year. By adjusting your withholding allowances on your W-4 form at work, you could increase the size of your paycheck right away.
Ask your human resources manager or your boss for a new form W-4. It should take you just a couple of minutes to complete. There’s a worksheet that goes with the form to help you decide how many withholding allowances to claim. If you still have questions, contact your local tax professional for advice on withholdings.
If you do adjust your withholdings, this means your tax refund next year will be smaller, but your paychecks will be a bit bigger throughout the year.
Recently enacted tax law changes mean many Americans will see a bit more money each month. If you decide to change your withholdings to increase that amount, make a plan for the extra money that includes paying down your debts in a timely manner and saving for unexpected expenses.
Taxes can be overwhelming. That's why we've created the Sunset Finance Guide to Tax Returns to provide you with more information.