Here are a few ways to spend your Tax Refund!
Receiving a large tax refund can feel like you won the lottery. For many of us, it’s the biggest paycheck we receive all year. That’s a lot of “extra” money at our disposal.
In fact, about 3 in 4 Americans receive a tax refund each year with the average federal tax refund being $3,200 in 2022. Keep in mind, however, that the money you got back was yours all along. You just gave Uncle Sam a year-long loan and he didn’t have to pay any interest on it. Not a bad deal for him.
While you shouldn’t necessarily aim to get a large tax refund every year, here are some ideas on how to use your windfall from Uncle Sam.
Pay off Credit Card Debt.
Life is expensive. And a lot of what we buy for ourselves, and our loved ones goes on a credit card. Unfortunately, the average credit card interest rate is 19.28 percent.
That’s why if you have credit card debt, consider using your tax refund to go toward paying that off first.
Add to your emergency fund.
Life happens. And so do unexpected emergencies. The whole world experienced one in 2020, when COVID-19 caused great financial hardship for many people. In the autumn of 2021, some 63 million Americans (29 percent of the adult population) reported it was difficult to pay for household expenses such as food, rent/mortgage, car payments, medical expenses, and student loans.
What can I claim on my W4 to get more money?
To receive a bigger refund, adjust line 4(c) on Form W-4, called “Extra withholding,” to increase the federal tax withholding for each paycheck you receive. Tax withholding calculators help you get a big picture view of your refund situation by asking detailed questions.
If you’d rather have a bigger paycheck and a smaller refund, you can control this. All you must do is submit a new Form W-4 to your employer to adjust your federal income tax withholding.
Adjusting your withholding could move your refund to your paychecks!
If getting your refund throughout the year rather than at tax time sounds appealing, you can adjust your withholding today. To do so, you’ll need to fill out a new Form W-4 and submit it to your employer.
This form requires you to fill in a few sections depending on your situation. The more accurately you complete the form, the more precise your withholding should be.
In summary, income tax can be used for many reasons. It can be used as “fun” money and splurge on wants versus needs, or it can be used to pay down debt and as a stepping stone to financial independence. Choose wisely!