USA TODAY International Edition
To invest or splurge?
The IRS is behind on processing refunds, but you should plan how to use it now
Tax refunds are coming at an opportune time this year for many Americans – despite an IRS processing lag delaying the money.
Inflation increased nearly 8% compared with last year and household savings are drying up as cash- strapped consumers take on more credit card debt to finance purchases.
The IRS has issued more than 57.9 million refunds totaling nearly $ 189 billion, as of March 25. The average refund was $ 3,263, up 12.4% from a year ago, according to the IRS.
Since the start of tax season, the IRS processed more than 78.8 million tax returns. That’s up 3.8% compared with the same time last year.
The processing delay – prompted in part by stimulus check mistakes – can be a blessing in disguise if you make a plan before the money arrives to avoid impulsive spending once it does, said Sharon Powell, an educator with the Family Resiliency team at the University of Minnesota Extension Center.
“It’s just like going to the grocery store with a list – you’re more likely to stick to it.”
Talk about your plan with immediate family members or a trusted adviser said Mary Jo Katras, program leader of the Family Resiliency team, which helps Minnesota residents manage their finances. “Figure out how can we use this money moment to benefit as a family?”
Don’t beat yourself up if you deviate from the plan, Powell added. “I really support people taking some of their refund money to do whatever feels good to them so they don’t have as hard of a time focusing on the more discipline choices.”
So, what could you do with the remainder?
Use tax refund to pay off debt
Interest rates on credit cards, auto loans, and mortgages have risen since the Federal Reserve raised interest rates last month for the first time during the pandemic. Borrowing money will become even more expensive as the Fed prepares to raise interest rates six times this year in a bid to lower inflation.
So, if you’re sitting on a lot of debt, consider using a portion of your refund to pay it down or off, said Ted Rossman, senior industry analyst at Bankrate. com
Start with the debt that has the highest interest rate. That’s likely credit card debt since the average credit card charges a 16.36% interest rate, according to data from Bankrate.
“That’s three to five times higher than what most people are paying on other financial products like mortgages, car loans, and student loans,” said Rossman. “So I’d make a strong case for paying off credit card debt given what fed is doing with interest rates.”
But he cautioned “if put you put your refund towards paying off credit debt and don’t have savings what are you going to do if your AC breaks? That’ll just restart the credit debt cycle.”
Ted Rossman Senior industry analyst at Bankrate. com “I’d make a strong case for paying off credit card debt given what fed is doing with interest rates.”