The latest data from the IRS reports that American taxpayers are seeing an average refund of $2,933 thus far in 2023. This is about a 10% decrease when compared to the average refund amount this time last year.
However, with things like inflation and daily living costs reaching an all-time high, having some extra cash on hand can be helpful for many.
While it may be tempting to spend your refund on a gratifying personal expense, or book a much-needed vacation, it’s important to consider your personal financial situation as a whole and prioritize expenses accordingly.
Here are 6 thoughtful ways to use your return:
1. Pay off Debt:
Consider using your tax return to pay off any outstanding debts, such as credit card balances or personal loans. Credit cards typically have high interest rates, which can prolong payments and make it more difficult to pay off your balance in a timely manner. Staying on top of your debts can help you save money on interest payments over time and improve your credit score along the way.
2. Build an Emergency Fund:
Set aside some of your tax return in a high-yield savings account to use in case of emergencies, such as unexpected car repairs or medical bills. A good rule of thumb is to save a total of three to six months’ worth of living expenses in case of job loss or other unforeseeable financial emergency.
3. Invest in Your Retirement:
Another great use of your return is to use the funds to make a contribution to your retirement account, such as a 401(k) or IRA. This can help you save for the future and potentially reduce your taxable income. Increasing your retirement savings is never a bad idea, since most experts recommend having ten times your salary saved by the age of 67.
4. Invest in Education:
Consider using your tax return to pay for education expenses, such as tuition or student loan payments. Investing in higher education has been shown to improve salary potential, social mobility, and even boost personal sense of fulfillment. If your return goes into a college savings account, such as a 529 plan, be sure to talk with your financial advisor to discuss the potential savings and tax benefits that could be available to you.
5. Increase Your Home Value:
If you already have adequate emergency and retirement savings and aren’t carrying any credit card debt, it may be useful to use your tax return to increase the value of your home by making a few improvements. Renovation projects that typically lead to an increase in property value can include repairing the roof or upgrading the kitchen.
6. Donate to Charity:
Have a cause you're passionate about? Consider using your tax return to make a donation to charity or a nonprofit organization. Supporting a good cause is not only emotionally rewarding, but it also comes with the added possibility of potential tax benefits for next year’s return.
Planning is Key:
Not sure where to start or have questions about your tax refund?
At Triumph Capital, it’s our job to collaborate with you on a thoughtfully designed plan that accounts for every aspect of your financial life.
Book a complimentary consultation with a trusted fiduciary financial advisor today to better understand your personal return and how a well-rounded financial plan could potentially help mitigate your tax liability in the future.
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