Households have record levels of debt. The balance rose to $18.04 trillion in the fourth quarter of 2024, according to the Federal Reserve Bank of New York’s Microeconomic Data Center.
President’s Day weekend has historically been a busy time of tax filing, and many Americans can resort to refunds to pay off their debts.
A refund can cause serious dents to your debt. According to the IRS, the average refund amount in 2024 was $3,138. But is paying off your debt the best way to spend that money?
Please check the refund amount before planning
It’s best not to make any financial moves until you actually get a refund. But if you want to start planning how to use it, there is a way to know how much will come to you.
If you have not yet filed your tax return, you can use your tax calculator to estimate your federal refund. Collect tax forms such as PayStubs, W-2 and 1099, as well as other documents you need to submit.
If you have already applied, you will find the exact amount of your refund on your tax return. You will also need an amount to track your refund status with the IRS.
First, cover your essentials
Before reimbursing debt payments, make sure that other important areas of finance are appropriate. If you are worried about covering important expenses like groceries and utilities, make it your number one priority. You can also assess whether you can save enough money to handle an emergency without having to undertake more debts.
Pam Rudd, a certified public accountant in Knoxville, Tennessee and senior manager of personal financial planning at the U.S. CPAS Institute, uses tax refunds to boost emergency funds or have no one. If so, set it up.
San Francisco certified financial planner Israilov recommends sacking at least three to six months’ worth of living expenses.
“This setup gives you peace of mind as you navigate unexpected life challenges,” Islaylov said in an email interview.
If saving it feels like a lack of reach, start with a smaller goal. A few hundred dollars can be a decent cushion.
Next, we prioritize high profit obligations
If you are looking after basic needs and emergency buffers, proceed to debt. We often focus on high-interest debts, such as credit cards and personal loans, which often carry over 20% of interest rates in our mid-teens.
Sarah Paulson, CFP from Appleton, Wisconsin, said:
Consider listing your debts in order from the highest to lowest interest rates. You can log in to your online account or check out our monthly statement to find the price. Second, you can apply a refund to your account at the highest price when you pay the remaining minimum amount, a strategy known as a debt avalanche.
Remember your value
The above guidance is a useful starting point for understanding how to use a refund, but you also need to think about what’s most important to you.
“This is why it’s called personal finance. It’s personal, and what works for one person may not work for you,” says Paulson.
You may choose to pay off your low-cost debt and wipe it out with a refund to bring peace of mind. Or you may find more value in putting money into your retirement savings, weddings, or holidays.
You can also allocate money to multiple goals, depending on the amount of your refund. This helps you take care of your financial responsibility without feeling unlucky.
“I’m a huge supporter of ‘targeting yourself’,” says Paulson. “It just makes sure you’re doing it in a way that’s actually satisfying and you’re feeling better at the moment, but you’re trying to make you feel empty after the facts. ”
Protects tax refunds
Some tax preparation services will offer you a tax advance or a tax refund loan if you submit a return to them. This may seem like a quick and convenient alternative to waiting for a refund, but it may not be rewarded.
This type of loan is “not a large financial decision overall,” says Rudd, due to the fees and interest that can be involved. You’re already paying to get the money that’s yours and ultimately you’ll be less.
Getting a tax refund loan is probably worth it unless you save yourself from the horrifying situation.
“I certainly understand that when rents go by, they end,” Rudd says. “But that’s one of my last options.”
Moreover, waiting for your refund may not take as much time as you think. According to the IRS, most refunds will be issued within 21 days. You can make your refund faster by submitting it electronically and choosing direct deposits. The tax deadline for most filers is April 15th.
Beware of refund scams too. If you’re not being vigilant, you can protect you from fraud and prevent you from moving further into your debt.
Lauren Schwarn writes for Nald Wallet. Email: lschwahn@nerdwallet.com. Twitter: @lauren_schwahn.
Articles should I use tax refunds to pay off my debts? It originally appeared in Nerdwallet.
Original issue: February 18th, 2025, 2:05pm EST
