A Bankrate survey found that 45% of U.S. tax filers expect to receive a federal tax refund in 2023 — up from 40 percent last year. Although refunds are expected to be smaller this time around, the IRS still puts the average individual tax refund at $3,140, which isn’t pocket change either.
If you’re expecting a tax refund this year, paying down debt, saving it for a rainy day or using it to boost your home equity are some smart ways to put that money to good use.
Tax return statistics
- Over 36.8 million Americans have filed their federal tax returns in 2023 — a 2.6% increase from last year.
- Out of those, roughly 36 million filed their taxes electronically.
- When it comes to preparing their taxes, Americans prefer the DIY approach, with 57% reporting filing electronically without the help of a tax preparer.
- The average individual federal tax refund is $3,140 — 11% less than last year’s average, which was $3,536.
- Most taxpayers receive their federal tax refunds within 21 days or less after filing electronically.
- 36% of U.S. adults who planned to file a tax return expect to do so by February of 2023, while 25% and 14% plan to file by March and April, respectively.
- 45% of tax filers expect to receive a federal tax refund in 2023 — up from 40% last year.
- 43% of Americans expecting a tax refund say their refund is “very important” for their overall financial situation.
- One-third of filers expecting a federal tax refund worry that this year’s amount will be smaller than expected.
- Most Gen Zers (31%) expecting a refund plan on saving it. Meanwhile, the majority of millennials (25%), Gen Xers (33%) and boomers (32%) plan on using the funds to cut down debt.
Tax refund and financial security
If you are expecting a tax refund and don’t need the money for essentials, you can always use those funds to increase your financial security. This is especially true now that there’s a 65 percent chance that the U.S. economy will enter a recession in the coming months, making things financially challenging for millions of Americans nationwide.
Pay down debt
If you have high-interest debt, such as credit cards, which have an average interest rate of 20.34 percent, using your refund to cut down those bills is always a good idea. If you want to tackle multiple debts, however, one smart way to do this is by using a debt consolidation loan.
When you take out a debt consolidation loan, you’re essentially combining all your debts into a single loan, with one monthly payment and possibly a lower interest rate. This, in turn, will allow you to get out of debt faster, as more money will go toward paying off your principal balance instead of going toward interest.
A recent Bankrate survey found that 57 percent of Americans wouldn’t be able to cover a $1,000 emergency expense out of pocket, with over one-third saying their credit card balances actually exceed their savings.
If your emergency fund needs a little boost — or if you need to start building one from scratch — your tax refund could be just the seed capital you need. What’s more, since the Fed has been hiking interest rates over the last several months, some banks are paying APYs upwards of 4 percent for their high-yield savings accounts, which automatically translates to higher returns.
If you’re good on both the debt and savings front, you can also make your tax refund work for you by investing it. Stocks and real estate investments currently have the highest return on investment, with an average annual return of 13.8 percent and 8.8 percent, respectively. If you do the math, that’s more than double the return on investment you’d get if you just let your money sit on a high-yield savings account.
Pay for home improvements
The average homeowner spent about $18,000 on home renovations in 2021. Considering that this year’s average federal tax refund is over $3,000, that money could reduce how much you spend by 17 percent or more, depending on how big your project is.
If you’re planning on financing your home improvements with a personal loan, using your tax refund to cover some of those costs can also cut down on the amount borrowed, saving you money on interest.
Boost your home equity
If your tax refund is sizable enough, you could use it to prepay your mortgage, which can save you thousands on interest. For instance, according to Bankrate, if you have a $200,000 mortgage with a 6.5 percent interest rate, you could save up to $60,364 over the life of the loan, just by making one extra payment a year. Not only that, but you could pay off your home in roughly 24 years, instead of 30.
This article originally appeared here and was republished with permission.