Though it may feel like your attention is being pulled in a million directions, you can’t procrastinate on your taxes much longer. The 2020 deadline for individuals to file is July 15.
It’s a pain, yes, but taking care of your taxes has benefits — namely, the fact that you’ll probably get a refund. Some 135 million returns have already been submitted as of June 5, and the IRS has already issued over 91 million refunds. So far this year, the average refund is $2,769: a not-insignificant chunk of change.
But how should you use that money? We consulted experts about the best things to do with your 2020 tax refund.
Remember Where It Came From
Sean Weissbart, tax guru and partner at Blank Rome LLP, says that although it may feel great to get a huge check back from the government, it’s not actually good for your wallet. A large refund means you’ve withheld too much from your paychecks. This amounts to “giving the IRS an interest-free loan,” as he puts it.
Unfortunately, a lot of people rely on their refunds for a financial boost. But even if your personal refund is only a couple bucks, you still need to be smart about how you use it.
“When you get a refund, my advice is to use the money to make more money or to achieve long-term goals rather than use it for frivolous or unneeded items,” Weissbart adds.
People are all over the map on this. Half of the respondents to a National Retail Federation survey said they planned to put their refunds in savings, while 34% said they planned to pay down debt, and 24% aimed to take care of everyday expenses. Only 9% said they were going to splurge.
Be Disciplined (to a Degree)
Heather Winston, assistant director of financial planning at Principal, says it’s natural to want to spend quote-unquote free money on something fun. And you can… as long as you commit to blowing no more than 10% of your refund.
“The reality is that you can still have fun with your tax return, but aim to balance the fun with some more responsible spending,” she says.
As for the other 90%? If you’re deliberate about it, Weissbart says you might even be able to use your refund to save more money.
For example, if you use your refund to contribute to a 529 educational plan for yourself or others, you could score a state tax deduction. Same deal if you tap it to pay off student loan interest.
Put It to Good Use
Weissbart says you should not put your refund directly into Cash App or an Amazon gift card, even though it’s tempting. Having a balance languishing in your account won’t do you any good, because you’ll inevitably fritter it away on things you don’t technically need.
Another mistake would be to dump the refund into a low-interest-bearing checking account. That’s just wasteful.
“As tempting as it can be to have a little bit of ‘mad money’ sitting around, think long-term,” Weissbart says. “That $100 could be $110 next year … growth can be tremendous if you’re smart about it.”