Save or spend? Make a smart choice with your tax refund

Saving is your best first step toward financial well-being

A man in a gray t-shirt sits holding his mobile phone and smiles as he checks his account and sees that he has been paid.

Expecting a tax refund this year?

If you’re like many Americans, your tax refund may be one of the largest checks you count on receiving each year. But before you start dreaming about how you’ll spend it this year, consider this: saving it could be one of the best ways to take a step closer to financial security.

In a national survey on the financial well-being of Americans, the Consumer Financial Protection Bureau (CFPB) discovered the biggest difference between those who feel financially secure and those who don’t is…savings.

So many of us aren’t quite there.

Lessons from Pandemic payouts

While the past year’s coronavirus pandemic has brought much economic disruption, a July 2020 study saw an increase across all income ranges in the ability to cover an unexpected $400 expense. The bump was biggest for low- and middle-income adults, thanks in part to stimulus payments from the CARES Act passed at the outset of the pandemic.

With another potential government stimulus payout on the horizon, so too is another opportunity to save. This savings lift during our present challenging economic times is an important reminder about what saving — tax refund or economic stimulus — can do for your financial future. Remember, pre-pandemic, a fall 2019 Federal Reserve study on the economic well-being of U.S. households found that:

  • 39% would have difficulty covering a $400 emergency expense from cash on hand
  • 27% could cover it only by selling something or borrowing money
  • 12% couldn’t cover it at all
  • Having the financial freedom to make choices that let you enjoy life

And as the pandemic reinforced, no one is immune to financial shocks.

Saving your tax refund is possibly the easiest way to save

Research has shown that setting aside just $500 can cover the most commonly experienced emergency expenses. But many of us who want to save don't think our financial situations allow it. According to the CFPB:

  • While 57% of Americans planned to save some of their refund, only 39% did.
  • Yet while 72% planned to use their refund to pay off bills or pay down credit card debt, 89% did

If you feel like you just can’t get ahead, making it a new habit to save at tax time may help you get started. A tax refund is a great opportunity to gain a stronger sense of financial well-being, by saving some or all of it to:

  • Help weather unexpected expenses that may occur later in the year
  • Give you the confidence to start saving for such longer-term goals as education, buying a home, retirement, or long-term healthcare.

Managing your refund
If you haven’t filed yet, consider filing your return electronically and opting for direct deposit. The IRS allows you to deposit your refund directly to as many as three separate accounts. It’s quicker and easier than doing this manually, and it may help you avoid the temptation to spend your refund.

Depending on the size of your refund, consider using it in this order:

  • Putting aside at least $500 as emergency savings, in a checking or savings account
  • Saving a portion for seasonal or occasional bills
  • Using any remainder to pay down debt, to save for long-term goals, or both

Whatever you choose, planning in advance to save some part of your tax refund can help ensure that you’ll actually do it. And if you just can’t get through refund season without spending on yourself, choose something meaningful but reasonable—and put aside the rest.

Refund loans
Some commercial tax preparers offer tax refund anticipation loans as an incentive, giving you faster access to “your money.” But keep in mind: it’s not your money yet—it’s a loan. And the fees on refund anticipation loans can be very high. You could end up with a good bit less than your actual refund, after fees.

Consider waiting to get the full amount of your refund from the IRS. If you file electronically, your refund will usually come within 21 days—more than twice as fast as a paper check.

Don’t get scammed
More and more, tax season coincides with an increase in fraudulent emails, identity theft, and other cyber crime, in part because so many people are online.

Two common scams:

  • Tax-related identity theft, where someone uses your stolen Social Security number to file a tax return claiming your refund. The IRS is taking a number of steps to reduce tax fraud. For more information on how to spot identify theft at tax time, read the Taxpayer Guide to Identity Theft.
  • Scam phone calls or emails posing as the IRS or a financial institution and asking for personal or credit card information. The IRS does not call or email consumers asking for personal information or demanding immediate payment.

For more on how to avoid other forms of cyber crime, see Protecting Your Identity and Personal Information.

For Tax Filers, There’s Help

Need a hand with filing your tax return? The IRS can help:

1) It offers free tax preparation assistance through IRS-certified volunteers at Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) locations, if any of these apply to you:

  • Your income is $54,000 or less
  • You are 60 years old or older
  • You have a disability or have limited fluency in English

Use the IRS locator tool to find a VITA or TCE office near you.

2) If your income is $64,000 or less, the IRS offers free tax preparation software, through its Free File Alliance.

3) If your income is more than $64,000, you can always download free tax filing forms from the IRS’s website.

4) If you’re a member of the U.S. military or a military dependent, free tax help is available to you from the Military VITA program.

This article is for informational purposes only and is not intended for use as legal, accounting, tax or professional financial advice by People’s United Bank or any of the bank’s subsidiaries. Financial calculators are for illustrative purposes only. Always consult your legal, accounting and/or tax advisor to fully understand how information may or may not apply to your personal or business financial situation.

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