Tax season - options for anticipated refunds.
Approximately 64% of U.S. taxpayers receive a tax refund. The IRS produced the 2024 filing season (2023 tax year) statistics for tax returns filed by individuals. The chart below is as of October 18, 2024, accounting for the October 17 filing extension deadline. Of the 161,489,000 returns received, 103,185,000 refunds were issued. Those ~103 million refunds amounted to $309.929 billion. An interesting data point is the average refund amount - $3,004.
That amount represents income you worked for, income not included in your paycheck (depending on set withholdings), and what is believed to be an interest free loan to the government. When that refund hits your hot little hands, you should have an idea of what you can do with the funds. I don’t want your voices to be part of the collective “huh?” at the end of May when asked what happened to your refunds. Do yourself a favor and consider some options.
Savings
Consider your full financial picture. Does your household currently have a reserve of funds? If so, how much is set aside and how long would that reserve sustain you if needed? Do you want to designate some of that refund for savings to add a bit more comfort to your sleep at night? Is this an opportunity to build a habit of savings? One small decision to conserve versus consume can go a long way in building confidence in your finances. Think about it.
Major purchases or reduce debt
Furniture, home or automobile down payment, large electronics or appliances, or travel plans can be viable options for how to allocate an anticipated refund. Trade the temporary dopamine rush of the big purchase with a lasting satisfaction of a purchase well planned. What about that pesky credit card or student loan balance that keeps staring you in the face? An opportunity to knock off a chunk? Perhaps.
Investing
Have you had your eye on mutual fund or other investment that requires a minimum investment? Could a portion of the refund be allocated to push you over the hump? If prevailing wisdom instructs us to invest early, why wait? Meet that minimum required amount and start working on your future wealth.
Specific goals
Additional education, savings goals, significant hobbies, business ownership/procurement, and professional exams are worthy achievements to strive for. A windfall of money should not cloud your efforts for the things you believe are important. Can a percentage of that refund assist you in checking off that goal with some remaining?
Do nothing
This may surprise you. If you don’t know where to direct the refund, don’t make any decisions until you ponder what makes sense for your financial situation. Especially if historically every dollar was connected to a crisis and you couldn’t think about real options for the future. This is a pivotal moment for you. I celebrate with you! Dream in color.
Adjust withholdings
No impact on the current refund but depending on how much you receive back every year, consider adjusting your withholdings on your W-4. Your household circumstances (and income) likely have changed since the initial designation. Worth revisiting regularly. Receiving more money each paycheck can help you regulate expenses and achieve goals easier. Contact an HR representative or log in to your employee portal and make the changes.
I recognize that I sound like a real killjoy right now. Part of me is okay with that because I am thinking about future you. But the other part of me wants to speak to current you. Enjoy your money. No matter when it arrived, regular paychecks or annual tax refunds, it is your money. You should benefit from a job well done throughout the year. I simply want us to be thoughtful and purposeful with our resources.
The 50% uncomfortable, 70% incremental, 100% vital principle still apply. Think about it and do the work. Remember, you are worth it! If you want to talk about it, drop us a note at letstalk@studiomfinancial.net. Until we meet…keep working on the change.