Do You Have a Tax Refund Habit?

What’s the Average Tax Refund?

  • The average tax refund in 2020 was $2,741.[1]
  • Nearly three-quarters of Americans received a refund last year, according to a nationwide poll.[2]
  • The poll also shows that people who received a refund saved some or all of it.[3]

 

Turns out, many Americans like giving Uncle Sam an interest-free loan — as long as it means getting a refund later, according to a nationwide poll conducted by Kiplinger’s and Barclays US Consumer Bank.

In fact, nearly two-thirds of survey respondents said that in general, they would rather get a refund than collect a bigger paycheck. Additionally, most taxpayers (74%) reported receiving a refund last year.

So, how did they put that money to use?

Most Americans Save Their Tax Refunds

About six out of 10 filers getting refunds saved some or all of it. While that’s a good financial move, taxpayers can do one better by shopping for institutions offering better-than-average interest rates on savings. Barclays, for instance, offers FDIC-insured online savings accounts and certificates of deposit (CDs) at higher yields than traditional brick-and-mortar banks.

And if you have multiple savings goals — say, a down payment for a house, a new car purchase and an emergency fund — consider setting up a separate account for each goal. That way, it’s easier to track your progress, and there’s less temptation to spend the money on other things. Some employers allow workers to split their paychecks and have money directly deposited in more than one account. Or, you can have your bank make recurring transfers from, say, checking to your savings accounts.

1 in 4 Taxpayers Pay Down Debt

Nearly a quarter of taxpayers getting refunds applied the money to credit card bills. That’s understandable. After all, although credit card debt went down during the first three quarters of 2020 (largely due to the lower spending because of the pandemic), Americans still owe about $810 billion in credit card debt, according to a November 2020 report from the Federal Reserve Bank of New York.[4]

If you’re applying your refund to pay off multiple credit cards, put the extra cash first toward the card that has the highest interest rate. This will save you the most in interest over time.

But if you need a periodic psychological boost to remain focused on debt elimination, try the “snowball” method. Apply your refund to the card with the smallest balance first. Once that debt is erased —success! — apply extra cash to the card with the next smallest balance and so on. Paying off smaller balances first may give you the mental momentum to tackle larger balances later.

Some Taxpayers Create Emergency Funds

Some respondents (6%) used their refunds to create an emergency fund. That’s smart because saving for unexpected expenses — such as a job loss or medical emergency — can prevent you from having to put big bills on a high-interest credit card. Generally, people are advised to keep at least three- to six-months’ worth of living expenses in an emergency fund. The money needs to be safe and liquid, so you can have easy access.

For example, you could invest your emergency funds in multiple CDs with different maturities. You’ll lock in higher interest rates offered on longer-term CDs, but still retain access to a portion of your cash as the shorter-term CDs mature. 

1 in 10 Taxpayers Invest Their Refunds

About 10% of those getting refunds invested the cash. For workers, one easy way to do that is through a traditional or Roth IRA. For 2021, you can contribute up to $6,000 in an IRA, and kick in an another $1,000 if you’re 50 or older.

You can contribute to a traditional IRA no matter your income, although if it’s below a certain level you may be able to deduct your contributions on your next tax return. Your withdrawals will be subject to income tax. A Roth IRA has income limits, and you can’t deduct your contributions, but withdrawals are tax-free in retirement.

And Some Spend It on Splurges or Essentials

For some taxpayers, a refund is like newfound money, and they aim to enjoy it. About 16% of those with refunds used the cash to buy gifts or a vacation.

But another 16% said they spent their refund on everyday items, such as groceries. According to the most recent figures from the Bureau of Labor Statistics, households spent an average of $4,643 on food for home consumption.[5] The average refund is enough to cover more than a half years’ worth of groceries for the home.


[1] IRS.gov, July 2020.

[2] Kiplinger-Barclays US National Poll of American Taxpayers, 2020. 

[3] Kiplinger-Barclays US National Poll of American Taxpayers, 2020.  

[4] Federal Reserve Bank of New York, November 17, 2020.

[5] Bureau of Labor Statistics, September 9, 2020.