More than half of taxpayers expecting a refund for the 2017 tax season already know how they’ll spend the money, according to a new survey from Credit Karma Tax®. What’s more, they’re making smart choices for their refunds — saving the money or using it to pay down debt are the top ways Americans plan to use their refunds in 2018.
Not everyone gets a refund each year. The IRS issued more than $302 billion in refunds to individual taxpayers for their 2016 federal income taxes. The average refund amount was $2,782. Sixty-two percent of the 2,094 Americans surveyed by research company Qualtrics and Credit Karma Tax® said they expected to get a 2017 tax refund in 2018.
Nearly 73 percent of respondents said they got a refund from the IRS or their state for 2016, and most spent it on financially savvy goals like increasing their savings (22.5 percent), paying off debt (24.6 percent) and paying down credit cards (13 percent).
Taxpayers planning wisely
Taxpayers are planning to make similarly smart choices for their tax refunds next year, the survey found. Fifty-four percent of those expecting a refund say they know how they’ll use it, with 22 percent planning to save it in the bank.
About 24 percent will put it toward paying off debt, including student loans, unpaid medical bills as well as other types of debt. Nearly 16 percent want to use it to pay off credit card debt. Another 11 percent will save it for a specific goal, such as buying a house or car. The remainder plan on using their refunds to purchase something, or for an event or travel.
“Refund season is one of the most anticipated times of year for many Americans,” says Bethy Hardeman, chief consumer advocate for Credit Karma. “It’s really uplifting to see that while a majority of people expecting refunds already ‘have them spent,’ they’re planning on spending their refunds to improve their financial well-being. It may be easy to use their refunds to splurge, but many Americans are choosing to put their refunds toward building long-term financial health instead.”
Who’s planning what
Perhaps even more surprising is that having a good plan for an anticipated tax refund spans age groups, gender and income levels. Sixty-three percent of millennials expecting refunds are planning ahead for how they’ll use the money, the survey found. A solid 52 percent of Generation X and 42 percent of baby boomers are also planning ahead.
The percentage of respondents who had already planned on how to spend their refunds varied little across income levels, ranging between 52 percent for those with annual incomes of $25,000 to $49,999 and 56 percent for those earning $50,000 to $99,999 annually.
Differences in planning grew slightly larger when it came to gender; 57 percent of women expecting a refund know how they’ll spend it versus just 48 percent of men. What’s more, 77 percent of respondents who were married or had a domestic partner said the decision on how to spend their refund was typically a joint one made with their partner or spouse.
Getting your refund faster
“It’s a great idea to think ahead about what you want to achieve with your tax refund,” Hardeman says. “If you have a plan in place, you might be less tempted to splurge with the money when it lands in your account.”
The IRS will begin accepting 2017 federal income tax returns on Jan. 29, 2018. Once you file your return, the IRS says it generally sends a refund within 21 days.
Bethy Hardeman, chief consumer advocate for Credit Karma
Although you can’t hurry the IRS, there are some things you can do to help make the filing and refund process go smoothly:
- File as soon as possible. Once you have all the necessary documents to file your tax return, don’t wait. The sooner you get your return into the IRS, the sooner you can get your refund. What’s more, filing early could help reduce your risk of falling victim to tax fraud.
- E-file your tax return. The IRS says e-filing is a fast and accurate way to file tax returns for both individuals and businesses. Remember, the sooner the IRS gets your return, the sooner it can send your refund.
- Get free help. Consider saving yourself some money while getting help filing your taxes by using online tax preparation software. For example, Credit Karma Tax™ is completely free and can help people file simple federal and state income tax returns.
Smart refund planning
If you’re expecting a refund and still aren’t sure how you’ll spend the money, Hardeman advises taxpayers to consider following the lead of the consumers in the Credit Karma Tax™ survey. Here are some good uses for your federal income tax refund:
- Increasing your savings or creating an emergency fund: Finance experts typically recommend you save enough in an emergency fund to cover three to six months of living expenses, depending on your personal situation.
- Paying down (or off) credit card debt: Credit card debt is one of the costliest kinds of debt you can have, with the average credit card interest rate hovering around 12.5 percent. But depending on your situation and credit history, you could be paying much more. Reducing your total credit card debt reduces the amount of interest you’ll pay.
- Making an extra mortgage or car payment: Assuming your loan allows you to pay ahead without penalties, using your refund to make an extra car or home payment can help you pay off the principle faster and reduce the amount of interest you’ll pay over the life of the loan.
- Saving toward a major purchase: When you apply for a major loan such as a mortgage or auto loan, the lender might ask you to put some money down. Increasing your down payment lowers the amount of principle you will owe. Plus, having money to put down can help show the lender you are responsible about managing money.
- Saving for retirement: If you haven’t been filing income taxes for very many years, it may seem as if retirement is so far off that you don’t have to think about it too much right now. But if you start saving for retirement early, you can help ensure you’ll have the nest egg you need when you are ready to retire. If you haven’t yet maxed out your contributions to your retirement accounts, consider putting your refund toward that.
“A tax refund can be a very welcome boost to your finances every year, especially when you choose to put it toward long-term goals that help build your overall financial well-being,” Hardeman says. “Planning ahead for tax season, e-filing early and thinking ahead about how you’ll use your tax refund are great ways to ensure you get the most benefit possible out of your 2017 tax refund.”