Average U.S. taxpayer receives nearly $3,000 refund
WASHINGTON — According to the Internal Revenue Service, the nation’s taxpayers received an average tax refund of nearly $3,000 in 2016 and will receive a similar amount this year. With more than 70 percent of tax payers receiving a refund this year, the American Bankers Association has highlighted six tips to help them use their windfall wisely.
“Tax season is the perfect time to take stock of your finances and figure out where you are with your financial goals,” said Corey Carlisle, executive director of the ABA Foundation. “Try to avoid the temptation of using all of your refund for big ticket purchases. Your refund is ideal for paying off debt that’s weighing you down or saving for expensive emergencies that arise when you least expect them.”
To help consumers make the most out of their money, ABA has highlighted the following tips:
- Save for emergencies. Open or add to a high-yield savings account that serves as an “emergency fund.” Ideally, it should hold about three-to-six months of living expenses in case of sudden financial hardships like losing your job or having to replace your car.
- Pay off debt. Pay down existing balances either by chipping away at loans with the highest interest rates or eliminating smaller debt first.
- Save for retirement or your child’s education. Open or increase contributions to a tax-deferred savings plan like a 401(k) or an IRA. Your bank can help set up an IRA, while a 401(k) is employer-sponsored. Or invest in a tax-advantaged 529 education savings plan to ensure school expenses will be covered when your child reaches college age.
- Pay down your mortgage. Make an extra mortgage payment each year to save money on interest while reducing the term of your loan. Be sure to inform your lender that your extra payments should be applied to principal, not interest.
- Invest in your current home. Use your refund to invest in home improvements that will pay you back in the long run by increasing the value of your home. This can include small, cost-effective upgrades like energy-efficient appliances that will pay off in both the short and long term – and with future tax credits. If you have more substantial renovations in mind, your bank can help with a home equity line of credit.
- Donate to charity. The benefit is two-fold: Giving to charity will make a difference in your community, and you can also claim the tax deduction.
ABA also stressed the importance of low-income workers filing a tax return—even if their incomes are too low to trigger any federal tax liability—in order to claim the Earned Income Tax Credit (EITC). Depending on a recipient’s income, marital status and number of children, the EITC can result in a refund of up to $6,269 to help them achieve financial goals.
For more tips and resources on a variety of personal finance topics such as mortgages, credit cards, protecting your identity and saving for college, visit aba.com/Consumers.