Here Are Some Smart Things to Do With Your Tax Refund

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  • Increases in unemployment and changes to the tax code might have signaled smaller tax refunds this year for many, but federal stimulus aid has come to the rescue.
  • Refunds this year are tracking closely to last year, when the average American got nearly $3,000.
  • Here are five responsible things to do with the money, and three smart ways to treat yourself.

For a while, it looked like tax season might not deliver the usual refund euphoria that grips most Americans every spring.

With so many people drawing unemployment benefits in 2020 and changes around tax withholding meaning less is being pulled from employee paychecks, many tax advisors expected a lot of disappointed clients this filing season.

President Joe Biden's $1.9 trillion coronavirus stimulus bill, however, saved the day. Among other things, it made the first $10,200 in unemployment benefits tax deductible for anyone making less than $150,000.

Tax-filing trends so far this year are tracking quite closely to 2020, when 72% of American taxpayers got an average refund of about $3,000, TurboTax tax expert Lisa Greene-Lewis said.

"A lot of people thought they would have lower or no refunds this year," Greene-Lewis said. "Many weren't aware of the deductions and credits they were eligible for, and then there was the relief under the Rescue Plan Act" on unemployment benefits.

So what should the average American do with a $3,000 refund check this year? Normally, any good financial advisor would tell you to save it, use it to pay off debt or invest it in something productive.

 "This is just money," said Adam Markowitz, an enrolled agent with Howard Markowitz PA CPA. "It's not found money and it's not a gift."

"The vast majority of Americans should probably save it."

Markowitz also knows the majority of Americans probably want to spend that money after such a long year. "People are itching to get out and do something."

So why not choose a happy medium?

Use half your refund to improve your financial well-being and half for your mental and emotional health. In the interests of sound financial planning and of some serious fun after a dreary winter, we offer the five most sensible things to do with your refund and three soul-recharging activities you can do for less than $1,500:

  1. Pay down debt — particularly high-cost credit card debt. It is probably the single-best thing you can do with a refund. The average annual percentage rate for all credit card accounts is 14.87% to 16.88%, according to Federal Reserve data analyzed by CNBC Select. Paying off a $3,000 balance would save you $446 to $506 annually.
  2. Invest in your retirement plan. You can invest and deduct up to $6,000 in an individual retirement account or $19,500 in a 401(k) plan — more if you are over age 50. With the average American significantly behind in saving for retirement, pension plan contributions are always a good idea. The deadline for 401(k) contributions was the end of last year, but you can contribute to an IRA until the extended July 15 filing deadline. "It also has a positive impact on your 2021 taxes," TurboTax's Greene-Lewis said.
  3. Build an emergency fund. The average American does not have much of a cash cushion to cover unexpected expenses such as health-care costs or car troubles. If the coronavirus has taught us anything, it's that circumstances can derail the best-laid plans. "Unless you are pandemic- and disaster-proof, there's no such thing as too much savings," Markowitz said. "Some people have been out of work for more than a year."
  4. Invest in yourself. You can get a tax credit of up to $2,000 to help cover the costs of any class or course at a university or vocational college. If you have aspired to broaden your educational horizons or add to your skills base, a $3,000 refund is your ticket. The tax credit also provides a nice leg up on next year's tax filing.
  5. Invest in your business. If you're self-employed and could use a computer upgrade, better transportation or a workspace improvement, invest your refund in your business. It will not only improve your ability to generate income but again will provide some tax benefit for next year's filing season.

Recharge with that refund

Any travel plans should include consideration of health risks from the coronavirus. The Centers for Diseases Control and Prevention recommends Americans delay travel plans until they are fully vaccinated.

  1. RV-ing with the family. You can rent a standard motor home from Cruise America that sleeps five for $120 per day based on a seven-day rental. A road trip somewhere amazing avoids the hassle and worry about air travel. Insurance will be more and gas prices are up significantly, so you may not want to drive to Alaska if you want to keep the cost down.
  2. A golfing trip. A May golf trip to Scottsdale, Arizona, with three nights in a hotel and three rounds of golf begins at as little as $252 per person based on double occupancy booking through TeeTimes USA. Getting there will cost you extra, as will meals and entertainment.
  3. A night out. If the stress and risk of travel doesn't appeal to you, there's nothing wrong with staying local and doing something special. A fabulous but socially distanced dinner at a favorite restaurant, a new toy or gadget that someone has been longing for, or a spa day for your stressed out spouse. Nothing makes you feel better than giving something special to someone you care about.
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