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What To Do With That Tax Refund

By on April 27, 2015
Categories: TAXES

Every year nearly eight out of ten taxpayers receive a federal tax refund.

According to IRS statistics, the most recent average refund was $2,792.

Overpaying the IRS

Of course, getting a refund means you overpaid the IRS and essentially extended the government an interest-free loan. Americans, however, love their refunds. In a recent survey by Bankrate.com, 57% of taxpayers said they wanted a refund versus 27% who hoped to neither owe nor get money back.

Calculating the Price of a Refund

The data analysts over at FiveThirtyEight.com, a popular website that revels in stories about numbers, has created a refund calculator that can help you determine just how much of a financial hit you took in 2014 by lending the government money.

To use the calculator, you have to share what you would have done with the money during the past year if you hadn’t overpaid Uncle Sam.

The calculator gives you three options. Instead of overpaying your taxes in 2014, you could have:

  • Put the extra money in a savings account.
  • Invested the cash in the stock market
  • Paid down your credit cards.

I tested the calculator for all three scenarios with a hypothetical $3,000 refund.

As you can see in the calculator results below, overpaying in 2014 wouldn’t have mattered if you would have just parked the cash in a savings account. Doing so would have only generated an extra dollar.

Putting Money in Savings Account vs. Refund

Investing in Stock Market vs. Refund

If you had sunk the $3,000 into the stock market instead, you would have been better off by $239.

Paying Off Credit Card Debt vs. Refund

Your best bet would have been to use the money to pay down credit-card debt. It would have saved you $331.

Adjusting Your Tax Withholding

If you are getting a refund in the four figures, and would like to stop the practice of loaning money to the government, head over to your human resources department and complete a new W-4 form. This form will allow you to withhold less of your paycheck for taxes .

What Americans Do With Their Refunds

So what will you do with your refund?

According to the BankRate.com poll, 84% of Americans say they intend to pay down debt, save, invest or use the money for everyday necessities.

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