Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Many Americans Will Use Their Tax Refund on Credit Card Debt

As April 15th rolls around, many people start planning for how they’ll use their tax refund. When you work for an employer, you pay taxes throughout the year on an estimated basis. You can decide how much is withheld from your pay, but what you actually earn and your deductions mean that you may pay too much.

If you pay too much in taxes throughout the year, the IRS issues a refund. A refund is simply a way of returning the overpayments you’ve made.

While some people unintentionally overpay their taxes because they overestimate their withholdings, other people prefer it as a forced savings option.

In 2018, the average tax refund was $2,825, and some people wait for their refund to pay for something like a vacation. For other people, they use their tax refund as a way to pay off debt.

LendEDU recently conducted a survey of 1,000 Americans who carried credit card debt at the time the poll was conducted. The poll was done online by the Pollfish, an online survey company. Respondents were chosen through the use of screener questions, and the poll ran for four days.

70% of Americans Indicate They Will Get Money Back from Their Tax Refund

The majority of Americans typically foresee getting money back from their tax refund. Based on the LendEDU survey results, nearly 70% of respondents said they would get money back from their tax return, while just over 30% said indicated the opposite.

The average current estimate for refunds people will receive based on IRS data is just around $3,120, a significant amount of cash.

A Common Tax Refund Use? Chipping Away at Credit Card Debt

While some people may view their tax refund as a windfall they can blow on fun purchases, financial experts don’t recommend this approach.

Instead, experts often advise people to stop viewing a refund as a gift or a windfall, because essentially they are just getting back the money that’s theirs. When you overestimate withholdings, you’re loaning the IRS your money interest-free, whereas you could have earned interest on the money during that time.

When you do receive a tax refund, the best thing to do is think long-term about how to use it—for example, paying off high-interest debt or adding it to a retirement account.

Based on the results of the LendEDU survey, most people do plan to make smart decisions with their tax refund.

More than 70% of survey respondents said they were planning to use money from their tax refund to pay off credit card debt, while nearly 21% said they wouldn’t be doing that. With even some of the best credit cards having relatively high interest rates compared to other types of debt, it is usually a sound financial strategy to use a tax refund for credit card debt.

Respondents who said they were going to pay off credit card debt with their refund also reported that nearly 65% of the total refund would go toward the debt. Nearly 36% said they planned on using all of their tax refund to pay down credit card debt, and just over 20% said they would put half their refund toward paying off credit card debt.

So what’s the takeaway? Many people do think long-term when it comes to spending their tax refund, but it also shows the weight of credit card debt for the average American and the work that has to be put toward paying it off, often with high interest rates.