A number of people are counting on their tax refunds to boost their overall financial health. Find out now what people said they were going to do with their refunds in the latest CreditCards.com poll.
If you’re one of the lucky federal tax filers who will receive a refund in 2021, you might already have plans on how you’re going to spend – or save – it.
According to CreditCards.com’s latest poll, 73% of participants expecting a refund said those funds are important to their financial health – 43% said it’s very important, while 29% said it’s somewhat important.
So what is everyone planning to do with their windfalls?
More than a quarter (28%) said they would save all or most of it, 25% plan to pay down debt and 17% said they’ll use it for daily expenses.
Some (8%) responded they will use the money to make home improvements, others (7%) plan to invest it and very few (3%) will treat themselves to retail items or a vacation (2%).
Paying down debt is a smart thing to do with a tax refund
Paying down credit card debt is one of the best uses of a tax refund, according to Ted Rossman, industry expert at CreditCards.com and Bankrate.
According to Yahoo Finance and the IRS, the average refund last year was $2,707.
“That right there could wipe out more than half of the typical household’s credit card balance,” Rossman said.
Credit card rates remain very high – the average is approximately 16% – so paying off that debt should be a priority.
Americans made a lot of progress paying down their credit card debt in 2020, Rossman noted.
“Between tax refunds and the likelihood of additional government stimulus, we should see a lot more of that in early 2021,” he added.
According to Experian, the average card balance is $5,315.
If you make only minimum payments at 16% interest, you’ll be in debt for almost 16 years and end up paying more than $5,800 in interest.
But if you immediately put the average tax refund toward the average credit card debt, you’ll owe only $2,608.
Paying that off with minimum payments at 16% will take 10 years and cost you approximately $2,200 in interest.
“Of course, we’d love you to pay even more than the minimum, but that shows the impact of a lump sum tax refund payment,” Rossman said.
Rossman noted that while filing taxes has gotten less complicated in recent years, there are some unique nuances to this filing season.
These include the ability to deduct up to $300 in charitable contributions (even if you don’t itemize) and the opportunity to claim unreceived stimulus funds.
“And while the unemployment crisis has been heartbreaking, it could lead to larger than usual refunds for some people, so at least there’s that silver lining,” Rossman said.
Tax refund poll: chief findings
Check out some other results from our latest poll:
- Income dictates need: Eighty-six percent of respondents making the least (less than $40,000 per year) and 74% of those earning between $40,000 and $80,000 said the refunds they expect to get were important to their finances. Out of those people, 61% in the lowest-income bracket and 41% in the middle-income households said it’s very important. Sixty percent of those with the highest incomes ($80,000-plus) who are expecting refunds stated it’s important for their finances, including 31% who said it’s very important.
- Women need more help than men: More women expecting refunds said it’s important for their finances (78%) than men (67%). More than half of those women (51%) said it’s very important, but only 35% of those men said the same.
- Millennials expecting the most refunds: About two-thirds (67%) of millennial filers are expecting refunds, compared to 58% of Gen Xers and 48% of baby boomers. A large percentage of those millennials (78%) and Gen Xers (75%) said it’s important for their finances, while only 62% of boomers agreed.
- Pandemic influenced responses: More than half (51%) of respondents said their households’ incomes were reduced due to the COVID-19 pandemic. And a large number of those respondents who are expecting tax refunds (81% ) said it’s important for their finances – and more than half (53%) said it’s very important while a little more than 28% said it is only somewhat important.
The survey of 2,494 U.S. adults was conducted online between Feb. 10-12, 2021. See survey methodology.
The gender pay gap may have reared its ugly head
Ben Reynolds, CEO and founder of Sure Dividend, said women may be depending more on their refunds than men because they were more susceptible to job loss and decreased wages or hours.
Reynolds also noted that because men are usually paid more money even when women have more education, the gender pay gap may have influenced women quitting or reducing their hours.
And as women sacrifice their jobs to care for children homeschooled by the pandemic, tax refunds may be more critical to their financial health.
Those with higher incomes may not have saved enough
While COVID-19 has impacted low-income people and women the most, Reynolds said, the highest-income households aren’t immune to being financially burdened. They, too, said their tax refunds were “important” or “very important” to their finances.
The highest earners may not be used to living on a more moderate income and may not have saved enough money when they were furloughed, had their incomes reduced or lost their jobs, Reynolds said.
In addition, they may have spent their regular monthly income on their usual discretionary expenses instead of adjusting their spending habits in case their former job positions were affected by the pandemic.
See related: Is credit card debt tax deductible?
Saving makes sense during the pandemic
Tax filers have been using their refunds to pay down debts for years. Bill collectors are well aware of this fact, and they typically count on extra commissions (related to a higher portion of their clients repaying old debts) during tax refund season, said Kari Brummond, tax preparer and financial writer at TaxCure.
However, with the financial uncertainty related to the coronavirus, it makes a lot of sense that more people are planning to save their refunds rather than pay down debt.
“Saving your refund gives you a financial cushion in case you lose your job, cut back hours to take care of kids or face any other issues related to the coronavirus or life in general,” Brummond said.
Be smart about what you do with your refund
Adam Deady, a certified financial planner at MassMutual, said it’s crucial to decide carefully how to maximize the impact of additional cash on your finances.
If you’re behind on bills, pay them – and if you’re carrying a lot of debt, make a dent in it.
But be smart about it, Deady said.
For example, if you owe on a high interest rate credit card, pay it off first before a lower interest rate student loan.
If you don’t have emergency savings, start building a fund. Those who came into the pandemic with access to savings had more options available to them than those who didn’t, and no one ever regretted saving too much when they could.
And if you are living paycheck to paycheck, any significant, out-of-the-ordinary expense can cause a lot of damage to your finances, Deady pointed out.
He suggested that if there’s anything you’ve been putting off getting repaired around the house or on your car because you’re worried about the expense, now would be a good time to put that extra money to use.
“Discipline is essential to healthy finances – [if] you come into extra cash, do not view it as free money to spend however you’d like,” Deady said.
Be organized about your finances and understand what you are spending money on.
CreditCards.com commissioned YouGov Plc to conduct the survey. All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,494 adults, of whom 1,237 anticipated receiving a refund. Fieldwork was undertaken online Feb. 10-12, 2021.