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Getting money back from the IRS? Read on to see what mistake you don’t want to make. [[{“value”:”
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As of Feb. 16, the IRS had issued more than 20 million tax refunds. And the average refund amount that went out as of that date was $3,207.
Since the 2024 tax-filing season is far from over, it’s fair to assume that number will change in the coming weeks. But in reality, you may not care what refund the average taxpayer receives. The most important thing is the amount of money you receive.
You may be inclined to spend your tax refund on something fun, no matter what it amounts to. But that’s a move you might sorely regret.
Don’t treat your tax refund as free money
One of the biggest mistakes you can make with your tax refund is treating that money like a gift from the IRS. A tax refund isn’t free money. It’s money you earned the previous year but didn’t collect right away, so the IRS is giving it back to you.
People who are inclined to treat their tax refunds as free money may also be inclined to use that money to splurge. But that line of thinking could hinder you from making savvier financial choices.
Remember, your tax refund is part of last year’s earnings you didn’t bring home. But let’s say you get a $1,200 refund this year and are inclined to spend it on a new TV. Well, think about it this way: Had your monthly paychecks been $100 larger last year, would you have spent that extra money the same way? Or, would you have used it for important things, like fixing your car or boosting your savings account balance?
Don’t spend your refund right away
You may be someone who is, in fact, in a position to spend their tax refund on something fun. But before you go that route, ask yourself:
How am I doing on emergency savings? If you don’t have enough money in the bank to cover three months of essential expenses, you should put your refund — all of it — into savings.Do I have high-interest debt I’m carrying? If so, you should use your refund to pay down your credit card balances.Have I made any progress with retirement savings? If you’ve already been working for several years and have yet to save a dime for the future, your tax refund might serve you well if it were to go into an IRA.Do I have big expenses looming, or ones I’ve been putting off? If you’ve been warned that your heating system at home is on its way out, you should probably earmark your refund for getting it fixed or replaced.
You may be excited to finish up your taxes and see that a nice refund is coming your way. But remember, that refund isn’t the IRS being generous. Rather, it’s the IRS giving you your own money back. The sooner you adopt that mindset, the more inclined you may be to put that refund to good use.
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