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What to Do With Your Tax Refund


NEW YORK (MainStreet ) – Simply utter the words “Tax Day” to friends and they’ll likely respond with a cringe and some serious eye rolling. Yet despite the stress and drudge many associate with filing tax returns, there is a light at the end of all the paperwork: the glorious tax refund.

As MainStreet has reported, it isn’t exactly a good thing to get a large refund. because that just means Uncle Sam is handing back the money you loaned it all year – without paying you any interest. But many still prefer to receive that big, fat check in the mail anyway.

Last year’s average refund wasn’t too shabby, coming in at $2,985, according to the IRS. And Larchmont, N.Y.-based tax attorney Julian Block predicts this year’s refund to be "a shade over $3,000" on average, such as around $3,050.

Block says that it has generally been a trend that the average tax refund increases over time. One factor that might net you a big refund this year is if you were unemployed for part of 2011, then got hired later that year. “If someone was out of work for part of 2011 but started working again in, say, May, the employer is going to be withholding income taxes as if the person were making that salary for the entire year, so there’s going to be over-withholding,” he explains.

Although the tax deadline is still two months away, it’s not too early to start thinking about what to do with your refund if you get one.

Certified Financial Planner Rick Kahler of Kahler Financial Group in Rapid City, S.D. suggests exercising a little prudence.

“I would recommend people strongly consider applying their tax refunds to any credit card debt, as most credit card interest is in excess of 10%, making reducing your

debt a wise investment,” he says. If you don’t have credit card debt, Kahler suggests contributing the money to your retirement account or a child’s college fund.

According to a recent Facebook poll conducted by TurboTax, most people seem to be thinking along these lines: The majority of respondents (56%) said they’ll use their refunds to pay off debt, and 16% said they’ll put it into savings.

MainStreet did a bit of social media investigation of our own, asking readers to share what they plan to do with their refund checks on Facebook and Twitter. Most of the responses had to do with home improvements rather than debt payments, suggesting that the sour economy has caused many to put off buying new furniture and appliances until more cash flow comes in.

“I hope I get enough to update the kitchen counter or build a pergola in my patio for some shade from the sun while I play ball with my dog,” says Sandi Gibson Sinnott. Meanwhile, Heather Kraning said she plans to get a new mattress “so I can hopefully wake up in the morning without a backache,” while Laura Klingaman Chrisman says she’ll be getting “a much-needed new refrigerator.”

A few other readers said they’ll use their refund to pay bills, such as S.G. Haney, who plans to use his check toward property taxes, car insurance and homeowners insurance.

Of course, some people intend to spend their checks in ways that seem a bit more fun. Karen Aalders asserts: “I’m going on vacation with my girlfriend without stressing about money.”

Kristin Colella is a writer/editor for MainStreet. You can follow her on Twitter at @KrisColella.

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Category: Taxes

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