So far this tax season, refunds are on the rise. According to IRS data, the average refund is more than $3,000. That’s not a bad amount of change, and it’s money that many consumers consider a “windfall.”|With the Great Recession a very recent memory, and with the economy and labor market still struggling, many consumers are saying that they plan to use their tax refund money prudently.
Recently, TD Ameritrade conducted a survey to find out what Americans will do with their tax refunds, and found that a majority of them plan to save or invest their refunds.
How Americans Plan to Spend Their Tax Refunds
According to the TD Ameritrade survey, only 19 percent of respondents plan to spend their refunds on purchases considered “non-essential.” Instead, Americans are interested in shoring up their finances with their tax return money, with 61 percent claiming that they will save or invest. Another 21 percent will use the money to pay down debt, and 18 percent will use the money to buy necessities.
Interestingly, Millennials are the segment most likely to save their tax refunds. The survey found that 67 percent of Gen Y taxpayers want to save or invest the money. There is speculation that many Millennials saw their parents struggle through the tech bubble bursting, and that the Great Recession is still fresh. Plus, Millennials know firsthand how tough the job market is right now. Having some savings set aside seems like the reasonable thing to do for many of them.
Is a Tax Refund a True “Windfall”?
Many see tax refunds as windfalls. The money is considered “extra” money that wasn’t planned for. It seems as though you are getting an unexpected “gift” when you get a tax refund. However, the reality is that a tax refund might not be a true windfall. After all, it’s called a refund. For many taxpayers, a tax refund represents money that you have overpaid to the government. It’s often just a return of your own money.
However, there are some cases when a tax refund is a true windfall — at least in part. If you have a refundable tax credit, such as the EIC or other credits, you might be getting a real windfall. Refundable tax credits are credits that result in a payment to you after your tax obligation is discharged. For some families, this means an actual windfall, since it goes beyond an amount that you are simply getting back from the government for what you paid extra.
Whether your tax refund is an actual windfall, it is important to carefully consider how you will use the money. It might be tempting to spend your windfall on something fun, like a vacation or a shopping spree, but the reality is that you need to be careful, especially if you have a somewhat precarious financial situation. Instead, you might do better saving your refund for a rainy day, putting it aside or investing it for the future. That way, when a financial emergency strikes, you are ready.