The average federal income tax refund is smaller this year, but it’s still close to $3,000. And for tight taxpayers, that can provide a financial boost.
As of March 24, the average federal tax refund was $2,910, down 10 percent from $3,226 at the same time last year, according to the Internal Revenue Service. The decline is mainly due to the end of more generous tax credits, which were temporarily extended as part of the federal pandemic relief program.
Particularly for families with limited resources, a tax refund is one of the few times they get a large sum of cash, and wisely allocating the money can help stabilize finances. “It’s the largest payment these households will receive all year,” said Stephen Roll, associate director of research at the Social Policy Institute at Washington University in St. Louis, who studies economic security.
Ideally, recipients can put at least part of their refund into an emergency savings account or pay off debt. Both are smart options, financial advisers say, given that a recession is possible and inflation, while declining, is still high enough to strain household budgets. According to the Consumer Financial Protection Bureau, a quarter of Americans don’t have emergency savings to cover short-term financial problems.
People often use their repayments to pay back borrowed money for unexpected expenses, such as medical bills or car repairs — and that’s a good thing, said Dr. roll. Paying off double-digit credit card debt saves more than putting the money into a savings account (although interest rates on high-yield savings accounts are rising).
By setting aside some money, you can mitigate the effect of surprise bills or fluctuating income. “When — not if — the unexpected happens, they’re prepared,” says Cindy Scott, a certified financial planner at Schwab Intelligent Portfolios Premium, an automated investment service.
How do you do that best? America Saves, a non-profit initiative of the Consumer Federation of America, recommends the “past-present-future” approach (or the “30-40-30” approach, if you prefer numbers). America Saves nonprofit director Kia McCallister-Young explained that it asks that you allocate 30 percent of your repayment to reduce your debt (past expenses); 40 percent for current needs or wants, part of which can be allocated to emergencies; and 30 percent for your future — for college or retirement savings, a down payment on a house, or even a well-deserved vacation.
Based on this year’s average repayment, that would mean about $870 in debt, $1,165 in your emergency fund and current expenses, and another $870 in the future. However, people can adjust the amounts depending on their priorities. “You have to decide,” said Mrs. McCallister-Young.
Some savers can get overwhelmed by the idea of trying to save a lot of money when their salary barely covers basic needs. Standard rules of thumb call for a rain fund that covers at least three months’ worth of income or expenses, such as housing, food and transportation. Dr. Roll said it might be less daunting to start smaller, say, save six weeks’ worth of income and use your refund toward that goal.
When filing your tax return, you can instruct the IRS to divide your refund into several accounts. For example, you can deposit part into a spending account and part into a savings account. By recording the savings when you file your return, you will be less tempted to spend the money.
It may also help to reframe how you feel about saving. Think of it as “paying your future self,” said Dr. Roll, instead of money you can’t spend – and imagine how you’ll feel months from now when a financial need arises. “How will your future self feel,” he said, “when you have that money on hand?”
Once you’ve got the money set aside, he said, don’t be afraid to use it when you need it: “That money is there to spend.”
Here are some questions and answers about managing refunds and tax time:
When is the tax return deadline this year?
The federal filing deadline for most Americans is April 18. But the IRS has extended the deadline for people living in areas affected by recent natural disasters. Residents recently hit by severe storms and tornadoes in parts of Mississippi and Arkansas, for example, have until July 31.
What if I want more money on my paycheck instead of getting a big payback next year?
Some people use refunds as a forced savings tool by deliberately “over-withholding” taxes from their paychecks. But if you want more money to pay for your expenses throughout the year, you can adjust the amount of tax withheld. Schwab’s Ms. Scott suggested using the IRS’s online withholding estimator to calculate the correct amount. Then use that information to complete IRS Form W-4 and give it to your employer.
(If you’re confused, she said, consider seeking professional advice to avoid the opposite problem. If you’ve underpaid taxes, you may need to write a check at tax time next year.)
Where can I get free help with my tax return?
The charitable arm of AARP, the advocacy group for older Americans, is offering free, voluntary tax filing through April 18 through its Tax-Aide program. While the service targets people aged 50 and over on low or middle incomes, anyone is eligible for assistance. For more information, visit the AARP Foundation Tax-Aide website. The IRS offers its Volunteer Income Tax Assistance program, or VITA, for those with incomes of $60,000 or less, as well as those with disabilities or who speak limited English. You can search for locations online.
If you’re comfortable filing your own return, the IRS offers options through the Free File program; free online tax software is available to those with incomes of $73,000 or less, and free online forms are available to anyone.
If you need help with problems other In addition to filing a report, such as possible identity theft, the IRS is offering no-appointment walk-in assistance on Saturday, April 8 and Saturday, May 13 at some of its taxpayer assistance centers. For more information and to find locations near you, check out the agency’s website.
