Responsible Ways To Spend Your Tax Refund

Every year around this time, people tend to engage in bragging contests about how big their tax refunds are. These folks are oblivious to the fact that savvier planning would have let them keep their money rather than giving it to the government in a tax-free loan.

That said, there’s something nice about receiving a fat check of seemingly “free” money, which comes with the temptation to blow it on something frivolous. Give Me Back My Five Bucks warns you against compounding financial mistakes by stumbling into a big refund, only to blow it.

Sensible moves to make with your refund include paying off debt, saving for retirement, fixing up lingering issues with your home or car and taking care of medical problems you’ve let rage unabated.

To make sure you’re not dealing with a big refund next year, recalibrate your withholdings or — if you’re a contractor — your quarterly estimated tax payments to stop overpaying the government.

How to spend your tax refund responsibly [Give Me Back My Five Bucks]

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  1. Torgonius wants an edit button says:

    Hookers and Blow

  2. Alan says:

    My general rule is 50% goes straight to debt payments, 25% vacation fund, 25% fun money/general account.

    Yes, I realize we are giving the government an interest free loan… but it is nice getting that fat check once a year. That feeling is worth the 10-15 bucks in interest I could have gotten.

    • AtlantaCPA says:

      It’s not just the lost interest, it’s the utility of the money that you lost for the year. Just as an example if the grocery store had a huge sale on soda you could seriously stock up if you had a little extra cash on hand, ultimately saving you more than just the interest you could had made. Just a simple example of course, but hopefully you see what I mean.

      • Blueskylaw says:

        Invest in the Soda Futures Market?

      • Sengfall says:

        Yeah, but if you suck at saving anyways, it’s still kinda nice to get a few hundred back.

      • dchs says:

        “It’s not just the lost interest, it’s the utility of the money that you lost for the year. Just as an example if the grocery store had a huge sale on soda you could seriously stock up if you had a little extra cash on hand, ultimately saving you more than just the interest you could had made. Just a simple example of course, but hopefully you see what I mean.”

        Well you can still do that with your tax refund. Simply use it all to buy soda in bulk and you would get the same savings or even bigger saving!

    • DFManno says:

      OK, so that’s $4 for debt payments, $2 vacation fund, $2 fun money/general account.

      Yeah, I got an $8 refund from the feds.

  3. sirwired says:

    What is this “refund” of which you speak…

    *sigh* $3500 to the feds this year, $1200 to the state.

    • tinmanx says:

      Same here, my wife and I owe what totals about a _full month_ (!!) of our take home pay this year. While others that we know get “free money” totaling more than half their yearly income. Fine, they are lower income, but why are they getting more money in their “refund” than they paid in taxes? I feel like the amount I owe goes directly to someone else’s “refund.”

      Sucks to be “middle class,” we get screwed in all directions.

      • crispyduck13 says:

        I’m “middle class” and normally get about one weeks take home pay as a refund. The people getting half a year’s salary as a refund are probably making less than 40k a year and have multiple children. It is expensive to raise a kid, I don’t really begrudge them the money.

        Now that I bought a house the interest deduction pushed my refund up to over 3 weeks pay. If you’re getting so screwed you might want to change your withholdings.

        • tinmanx says:

          My plan is to buy a house then have a few kids, soon. I just changed my withholdings this month, hopefully that’ll lessen the blow.

          I actually don’t feel bad having to pay taxes if that’s what I owe, I just get angry seeing others get so much back in a “refund” when they hardly paid out any in the first place. All I can see is my check getting deposited into their bank accounts. Yes, kids are expensive, but our taxes shouldn’t be lining the pockets of the parents. (I’m for assistance, but not for paying cash.)

          BTW, my sister working part time earned just over $10k (before taxes) and had to pay out $400 in taxes this year. She’s not happy about it either.

      • rdm says:

        “Fine, they are lower income, but why are they getting more money in their “refund” than they paid in taxes? ” answer: children. (usually)

      • dolemite says:

        I know people at work that make close to minimum wage but get back like $5,000 from the government. They rush out and buy TVs and rims and junk.

      • StarKillerX says:

        it’s called wealth redistribution.

    • McRib wants to know if you've been saved by the Holy Clown says:

      Withholdings: use them correctly.
      I claim 1 on withholdings, but 4 on the tax return. This is why I get a big tax refund.

      • sirwired says:

        As long as I’m not paying penalties or interest, I AM using them correctly.

        You are giving a large interest-free loan to the government.

    • Platypi {Redacted} says:

      I am there with you. Normally I am good, but had to sell off some stock options set to expire. I got a nice chunk of change last year in the sale, but it put me past the limit for child deductions and education deductions for a year. Sucks, since my wife is in school, and last year she was actually worth something! Oh well, next year I will be back to the norm.

    • kc2idf says:

      Meh. I get to use my state refund to pay my federal taxes.

  4. AtlantaCPA says:

    Ideally you shouldn’t have a large tax refund. That means you had too much withheld and gave a zero interest loan to the govt. I always aim to owe a reasonable amount (like $500), although aiming to owe nothing is probably the safest for most people.

    • dulcinea47 says:

      Yeah, aiming to owe is not a great idea IMO, too many people can’t plan ahead and having to pay that will put them in a bind. I aim to get the smallest refund. This year I got $190 federal, owed the state $12. It’s nice but it doesn’t make me go “whooo free money!”

      • AtlantaCPA says:

        You’re right, most people can’t safely aim to owe money without missing the mark and owing too much (and maybe owing interest). I tip my hat to your small refund, well done.

    • kosmo @ The Soap Boxers says:

      Also, you gave extra money to an entity with a spending problem. That makes you an enabler.

    • RandomHookup says:

      Cause how much interest is a savings account paying these days?

      • AtlantaCPA says:

        Not much these days, but someday they will, but that’s not really the point. It takes longer to explain but a lot of people talk about paying down debt with their refund: if they decreased their withholding and paid the same amount over the year instead of waiting until tax time, then they are effectively earning the interest rate of their debt in savings on the debt. In other words, don’t let that debt accrue interest until tax time, chip away at it with the same money along the way and you will get a big payoff in saved interest. That’s really the subtext when talking about interest these days since interest on savings is nil.

        But really that is all secondary to the utility of the money in the meantime… see other posts that talk about that.

        • frank64 says:

          Yes, if the refund is going to pay down debt, you have paid more in interest because you could have had more money in your paycheck to pay it down monthly. Makes sense.

  5. Murph1908 says:

    Gah, enough about the ‘tax free loan’.

    At a 1% interest rate, the $2000 tax refund would have brought you about $10 if you had “planned properly” and actually saved that money over the course of the year.

    To me, that’s a pretty small price to pay for some forced savings. That’s also a very small price to pay to be sure you don’t OWE several hundred on April 15.

    • castlecraver says:

      Except it isn’t forced savings. Rather, the money is gone — untouchable by you — until at least a few weeks after you file your return. You could have actually used that money over the course of 2011 instead of waiting until March 2012 to get it. What if your car needed $2000 in repairs in December?

      • Murph1908 says:

        Sounds like you described forced savings.

        • castlecraver says:

          I suppose you can define it any way you want to, but from a practical perspective it’d be a pretty terrible short term “savings” plan to put your money somewhere that would be 100% impossible to access, even in a dire emergency. If you’re ok with that arrangement though, I have a new “savings” account I’d like to tell you about… (comes with free swampland in Florida)

    • AtlantaCPA says:

      It’s really not about the interest, it’s about losing access to the money for the year. Interest is just the easiest to explain.

    • ahecht says:

      That’s assuming you’re debt free. If you used that extra $167 each month to pay more of your 20% APR credit card bill instead of paying $2000 after a year,you’ve saved $210 (on a sample $10,000 balance waiting a year and paying $2000 leaves a balance of $10000, while paying $167 each month leaves a balance of $9789).

    • Bsamm09 says:

      If you’re only getting 1% you’re doing it wrong. Interest sucks too. Paid at marginal tax rate. Qualified dividends FTW!!!

    • maxamus2 says:

      And you can’t just put $100 in a seperate account monthly?

      I’m glad people “trust” the government with their money, cause it’s not like they ever screw up and not give you your refund, give you wrong amount, tie it up for months on end.

      I can not believe people need someone else to “hold” their money so they won’t spend it. That is NOT the solution.

      • Murph1908 says:

        Yes. I can. You can, I assume. But many would spend every cent, and not have that kind of self-control.

      • FLConsumer says:

        Interest rates suck…but the stock market’s been quite good over the last year if you had decent picks. My portfolio last year was good for ~16.3% gain overall. or in the case of the $2,000 example, that’d be an extra $326 which could be used to purchase more stock.

  6. FacebookAppMaker says:

    While you may say that it’s not smart to give the government a tax-free loan, I disagree.

    I purposely pay more taxes (Possible in Canada by signing a form and handing it in to your employer). It comes to an extra 100-150/month taken off my taxes. However, come tax time, I get an extra 1,200 – 1,800 on top of the 1,500+ I would already be receiving.That’s 2,700.

    I use this money, each year, to pay for my two servers for a year ($2,200 USD). Yeah, I could pay for it each month, but then I would actually be paying more (My server hosts give discount for 12 and 24 month terms). What’s left goes towards bills.

    • ahecht says:

      Couldn’t you put aside money each month in a savings account to pay the annual server bill and take advantage of the 12 and 24 month rates? This would have the added advantage of having access to the money in an emergency.

      • FacebookAppMaker says:

        If I need money in an emergency, I withdraw funds from my paypal. I have a hefty balance in there from eBay and flippa sales.

        Yes, there’s a danger that PayPal closes my account. But I never have more than 20,000 in there (Only happened once where I went above that), so it’s fair game for small claims court in my province.

    • Veeber says:

      But is there a reason you couldn’t setup an automatic savings account (not sure if SmartyPig is available in Canada)? We can easily do the same in the US with the taxes by filing the right form, but now you’re locked into using it whenever your refund is processed. As opposed to it being in a bank account and you can use the moment you need to use it. Recently the IRS screwed up and withheld my refund because they had a typo on their end and thought I made 100 times my actual annual salary. If I was depending on that refund to pay that server bill I would have been in a lot of trouble.

  7. Blueskylaw says:

    I will be getting back a little over $1500. I’m planning on buying a pair of nice leather dress shoes and the rest goes towards debt reduction. If I never see the cash it’s easier to spend this “free” money to reduce debt rather than spend it all on goodies. I’m sure the government doesn’t agree with my plan to reduce my debt rather than stimulate the economy but ohh well…

  8. May contain snark says:

    Damn. If only I had read this article before spending my refund on volcano insurance.

  9. momtimestwo says:

    As much as I badly wanted a new couch (ours is 13 years old, cloth and smells like ass), I was responsible and put $1,000 into the Emergency Fund, $1200 to finish paying off medical bills and towards CC debt.

  10. crispyduck13 says:

    Spending a little bit on principle reduction on the mortgage, $1000 into savings and $1000 into home repairs. I’d love to pay down debt with it, but it makes me feel better to have a little in the bank for emergencies.

    Either that or join Torgonius for hookers and blow.

  11. axhandler1 says:

    Probably going to use most of mine as spending money during my trip to China this spring. Whoo-hoo! Also, on a side note, I just booked a plane ticket from NJ to San Fran for my sister’s wedding in July. That plane ticket cost me just $20 less than my plane ticket from NJ to Beijing, which I booked like a week ago for my trip in April. I feel like there’s something wrong with that.

  12. RandomHookup says:

    I just came in here to say…mine’s bigger.

  13. Cat says:

    Hookers and blow! Wooo Hooo!

  14. icntdrv says:

    I used mine to pay off the credit card

  15. bnceo says:

    Owed some $$ to mom for spotting me some on a family trip to Peru. The rest went to doing lots of work on my car (maintenance) and paying down some debt.

    Next year’s check will be used towards the final payment of debt along with my last car payment. 2013 is going to be a fine year for myself.

  16. DrPizza says:

    “These folks are oblivious to the fact that savvier planning would have let them keep their money rather than giving it to the government in a tax-free loan. “

    I see this repeated over and over. It’s a ridiculous statement. Other than liquidity, there’s no difference between having that money in your non-interest bearing checking account, and letting the government use it. Over the last 4 years, my return has varied between $3000 and $11,000 At current interest rates, I lost out on a miniscule amount of money that I could have earned, had I been putting that money in a bank. $50 in interest on $11,000. If someone has a $1000 return, the interest that they lost out on is trivia.

    However, the cost to have my accountant recalculate what I should be deducting during the course of the year would cost me FAR more than the amount I lost out on in interest. (My return is not simple – I provide all the accurate records, accountant does the return, I stand there dumbfounded and just ask “where do I sign” when the accountant is explaining why I’m paying a capital gains tax on a goat, depreciation schedules, rental property, farm expenses, farm income, etc.

    • AtlantaCPA says:

      Forget about the interest being earning in the bank, the larger issues are interest you could save paying down debt along the way instead of at tax time, and having access to the money in the meantime for emergencies or whatever. That being said, yours could be a case for still getting a refund due to complexity. One size does not fit all with taxes and if you can’t easily, safely figure the right amount to have withheld to owe nothing, then getting a refund is not a horrible thing (assuming you aren’t paying interest on payday loans throughout the year to make it paycheck to paycheck).

    • rdm says:

      After I owed 1/5 of my salary one year (I was a contractor and wasn’t very smart about putting money aside) and having to pay off the IRS for a couple years, I’ll gladly get a couple/few grand back in refund every year.

  17. Starfury says:

    We’ve been doing pretty well and also got a nice refund (more than expected.)

    So we went out and replaced the old/nasty hide-a-bed couch and ancient kitchen table.

    That accounted for about 3/4 of the refund which is fine. Bought from a local business and the couch is made in Los Angeles.

  18. RedOryx says:

    My plan:

    Pay off credit card balance.
    25% of remaining goes into savings.
    Rest goes towards new running shoes

  19. vorpalette says:

    Used mine to put a 40% down payment on a new to me AWD car. Spending the money to fix my 14 year old Nissan just wasn’t worth it to me anymore. I cleaned it up and will get about half the loan balance out of it, will pay down the loan, and then pay off the car early. Next year, that money is going towards paying for our wedding, provided we still need it. Otherwise, paying off any remaining debts.

  20. El_Fez says:

    I threw mine straight away into my savings account. Not touching it at all, not even acknowledging that it’s there.

  21. IGetsAnOpinion says:

    Paying my car off 6 months early. Even if I had less taken out each paycheck, it wouldn’t have gone to paying more on the car loan so this works out better for me. That car loan amount will now go automatically into savings instead.

  22. Yorick says:

    mine went to car repairs. Again. I would love to be able to use it for something else. But, I also know that if I had that money over the course of a year – where it amounts to probably 1-3% a week out of a paycheck — that I wouldn’t have that larger amount when I need it most, because it would be used for other immediate things.

  23. amuro98 says:

    So what do you do when your company’s finance department only allows up to 9 allowances on your W4 without having to submit to some unspecified inquisition? According to the website I should be declaring somewhere around 12.

    (yes, I realize if you’re doing the math, this isn’t really a “problem” per se…but I’d much rather have that extra money each month!)

  24. NumberSix says:

    For me, found money always goes in the bank.

  25. MikeVx says:

    In the past, the major use of the tax refund was to beat down outstanding debts. Now that an infusion of money has obliterated all my outstanding debts and left something over, the tax refund will hopefully put my emergency fund back to where it should be.

    As for refund-or-owe, I’ve been on thin finances too many times to regard those who don’t aim for a fair-sized refund as anything but insane. If something unexpected happens you risk finding yourself in the position of owing the government money you may not be able to get on a schedule they find acceptable. This can cost you a great deal more than any combination of benefits you can project from having the extra money elsewhere for that year.

  26. Actionable Mango says:

    Is there an actual place where I can earn interest these days?

  27. catastrophegirl chooses not to fly says:

    my refund isn’t huge, not like it used to be when i was poor. but i can’t adjust my withholding any differently. the payroll department actually won’t let me make any other changes. what i end up getting back is due to deductions like volunteer work mileage, donations, medical expenses – stuff i can’t actually accurately predict in advance to withhold for anyway.
    it’s still going to pay off a an interest free for 12 months bill anyway. the bill isn’t “due” until july, i just want it gone.

  28. drjayphd says:

    Every time someone writes anything remotely resembling “These folks are oblivious to the fact that savvier planning would have let them keep their money rather than giving it to the government in a tax-free loan,” I throw a chair. I live off the money I have, and use the big return (almost $1,200 this year) towards something special.

    In this case, a third of that went towards credit cards, $300 into savings to go towards my wedding, and the rest was set aside for car taxes (which I’m contesting anyways because the city still thinks my car’s worth $10,000… yeah, they should talk to the dealers that told me it’s only worth $2,500). Sure, I need to sit down and take a better look at my finances, but not because I’m using taxes as forced savings.

  29. pythonspam says:

    I started a new job last year and they calculated my withholding almost perfectly (1040, standard deduction). Ended up getting $22 from the Feds and turned around and turned around paid $8 of that to GA. Also, thanks to a new deal with efilers, state taxes were filed for free.

  30. voiceofreason says:

    Refund?