What Is a Tax Refund? How to Make Judicious Use of the Lump-Sum Annual Amount?

    What is a Tax Refund?

    Tax refunds are not gifts from the government, and it is a reimbursement to those taxpayers who have overpaid their taxes often when employers over deduct extra tax from the paychecks.




    The IRS reports that 77% of the total tax returns filed in the US generated Tax Refund, and the average ticket size of the refund was $2,815. So, if you eagerly await a tax refund, you have good reasons to be optimistic.

    Why Did I Get a Tax Refund?

    In the US, nearly three-fourths of the taxpayers whose taxes are over-deducted at the source results in tax refunds.

    One may also qualify for a tax refund credit which usually happens when there is earned income tax credit, Child Tax Credit, or Premium Tax credit.

    Tax Refunds are Boon.

    Tax refunds have come as welcome receipts though it is one’s own money. Post the pandemic, rising inflations and interest rates have put households under extra financial pressures and expiring government assistance programs.

    According to a certified financial planner, one should save the tax refund and use it to supplement the monthly budget, which is already squeezed. This will help the month’s cash flows. While refund priorities vary according to particular situations, there is room for everyone to use it for personal enjoyment part as well.

    Types of Use for Tax Refunds

    • Save for an Emergency

    Saving for an emergency like job loss, a Covid-like situation, or high inflation where there is an extra expense. Las Vegas-based National Financial Educators Council CEO, Vince Shor, says it is essential to think about short-term security where one takes care of the food and gas. It is better to have an emergency fund than any other priority, including clearing off the debts.



    • Payoff Interest Debts

    With interest rates rising this year and credit cards and other variable rates, loans will result in higher monthly installments, making the debt more expensive. A certified financial planner (CFP) in San Francisco, Mika Biggica, says it would be smart to use the refund money to offload the debt. This will improve the monthly budget and cash flow, easing household pressure.

    • Use for Other Goals

    Making room for other goals after taking care of emergency funds and high-interest debts is recommended if there is surplus cash. Putting the tax refund payment amount in a high-yield online savings account is beneficial. Increasing one’s contribution to retirement accounts such as 401(K) is an excellent option.

    • Splurge

    If there is still some left from the tax refund, it is better to use it for fun and enjoyment. One can spend on dinners, concerts, and shopping and CFPs suggest spending 10% of the tax refund on Fun. Considering that last year an average US taxpayer got a refund of about $280, this is not too much to spend on personal entertainment.

    Hence, you can see that tax refunds could be very useful and beneficial in different aspects to say the least.



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