The Average Tax Refund And How To Spend It

The average tax refund is roughly $2,750.  With the US per capita income at around $48,000, that’s 6% of one’s income they’ve overpaid to the evil empire.  Everybody knows that getting a refund is like giving the government an interest free loan.  But, with interest rates the way they are, who cares?!

If you were to ask people to put aside $230 a month to save $2,750 a year, I bet most would fail due to the lack of discipline.  As a result, I think it’s fantastic most people are getting refunds.  The key is not blowing your refund on some splurge you wouldn’t otherwise spend money on if you didn’t get a refund.

In 2011, I had to pay about $1,000 more in Federal taxes, but I got several thousand back from the state of California.  For the past 10 years, I’ve saved or invested every single refund I’ve received, and this year was no different.  Boring!  At least a philosophical post came out of it entitled, “Is Paying Taxes A Form Of Charity?

Here’s a neat infochart with more ideas of what to do with your refund.  I like the rocket ship chart of investing your refund every year until you retire with a 7.5% return.  Buying a nice Macbook Pro would be sweet too, however, that’s a corporate expense, baby!

If you are like me, you should be motivated to invest and pay down more debt with your refund, rather than spend it on superfluous things.  Although buying 1,000 lottery tickets sure sounds like way more fun!

Make Money with Your Tax Return Infographic
Via: Your Local Security

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Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I think this info graphic is so interesting. I also think you are right – most people don’t have the discipline to put money away so paying extra taxes and getting a refund is almost like forced savings.

    • says

      Yes, a refund is most definitely like forced savings. I don’t mind the gov’t forcing me to save a little… but anything more than say…. $3,000, and screw you Evil Empire! I want my money! ha.

  2. Robert @ The College Investor says

    I haven’t got a refund in years but I regularly invest over the course of the year anyway. My paycheck deductions don’t cover the side incomes, which I’m fine with since I don’t want to loan anything to the government.

  3. Jonathan says

    We’re getting a refund this year for the first time since we’ve been married. If it comes in the next week or so, it will be just in time that we won’t have to transfer money from one account to another to be able to wire in our down payment/closing costs on another rental home. We don’t consider it (or any income, really) as “found money” to be spent on something special – all of our income is part of the same pot. Regular and discretionary expenses come out, and the rest is saved to be invested.

      • Jonathan says

        Haha, nice one…Well as it happens we’re spending 11 days in Hawaii and returning the day before our anniversary. So that will have to count. It will likely cost at least the amount of our refund, excluding the plane tickets we already bought. But my wife is fully on-board with our spending/saving/giving/investing strategy and would not be pleased if I spent big bucks on an anniversary gift without warning!

        • Jonathan says

          We don’t have a budget – due to the generosity of the wife’s parents we’re not paying for lodging (and they’ll be with us for the Maui portion of the trip). Our biggest cost will be the rental cars and food (aside from the plane tickets we already bought). We love hiking, which is free, and snorkeling which is generally free; but we may be getting scuba certified in advance of the trip so we’d spend on a scuba trip or two, and a few other activities.

  4. David M says

    I put all of my refund about $8,000 (state and federal) into the bank.

    My wife is self employed and I do not want to do estimated taxes – thus, I overpay and get a refund every year. IF interest rate were higher I might try to do a better job estimating what I owe – however with rates so low – no worries.

    In past years I have put my tax returns towards my mortgage – however with my rate so low on my mortgage – I would rather keep around “just in case” or invest in something other than paying down my mortgage.

  5. says

    Kind of boring, but with my $1,500 refund, I just saved it for my next real estate purchase. I actually don’t have a problem at all with under with holding. Like you said, most people won’t be able to save a couple hundred a month, but if it’s taken out of their paycheck, they absolutely cannot spend it! The government is helping you save, the key though, is to not splurge your refund check once you get it..

    Financial Advice for Young Professionals: What Should I Do With My Tax Refund?

  6. says

    I love the illustration!

    I think I did pretty well at estimating my withholdings last year – my refund was under $1,000. I took the “boring” route and did exactly what I would have done with the money if I’d seen it throughout the year and put it into my down payment savings account. I get paid monthly, so it was nice to see that account get a boost partway through the month :)

    And now I’m teaching the magic of adjusting withholdings to my friends so that they too don’t have large tax bills at the end of the year! (Our employer doesn’t take enough taxes off of bonuses… Sigh.)

    • says

      Interesting what you say on bonuses… b/c here in the US, a bonus is treated as that week’s pay X 52. So, let’s say you got a $10,000 bonus, the IRS will think you make $520,000 a year, and therefore tax it at the highest marginal tax rate!

      • says

        I’m in the US! My employer takes a flat 25% of federal income tax off of my bonuses, which is bad because I’m already in the 28% tax bracket from my regular salary. So I’ve started having them take off more tax from my regular paychecks to make up the difference.

  7. says

    I owed money.

    As you say, with interest rates so low, it’s not a big deal either way if one gets a refund. It may even mix well with human psychology- the money that they overpaid little by little might not have been saved by most people, but if they get it in one lump some, they might save some of it.

  8. says

    Unfortunately, this year I owe some income tax to the IRS and a very small refund from the state. The net is roughly $1,200 owed. Normally I am better at estimating taxes and usually receive a couple hundred dollar refund. I always put it in savings!

  9. says

    Sam, I agree with your logic about refund. It’s for those who are not disciplined in the first place. Problem, my friend, is that those spendolics will spend every single dollar before even they receive refund from our royal government. There is a thriving industry that lends money to these same morons, and making killing. Thank you Uncle Sam!

  10. says

    I got about $800 back fed/state combined. I used part to pay the property taxes/registration on my car, spent a little bit on clothes and food to treat myself, and put the rest into savings.

  11. says

    We typically get a refund of between $3k and $5k. We usually use it for a large-ish home improvement project, and save the rest. One year we got our house painted a new color, another year we installed energy efficient windows throughout. This year, we used it to pay for a surgery for our 15 month old.

    We could take the money throughout the year, as we’ve grown in our discipline as we’ve matured, but I don’t mind letting the Gov’t borrow it for free for a year. I also started doing some contract work “on the side” and am not quite sure what I’m going to have to pay in taxes at the end of the year, so I didn’t adjust my salaried withholdings.

    Great article!

  12. College&Beyond says

    I got my 3K refund on March… Used 20% to pay some high interest debt (Darn Credit Card you win this round) 15 % to buy a new cheap computer , mine was already screaming to be put out of her missery and the other 65 % went into my Savings/Investment accounts.

    I dont mind for now giving the Government an interest free loan, it help me boost an extra savings amount at the end of the year, and makes me feel I am constributing to the well-being of the country (except for the incorrectly spent money, but I will refrain from that for the moment) Uncle Sam is helping with my college education, and also gave me the opportunity to make my life here, as an inmigrant that means a lot to me. So I may as well give back some of what I have earned as a interest free loan.

    I wish more people were wiser with their tax returns, but I think that is too much to ask for. At least I know great websites like this one and others are making the effort to inform people on financial matters, so there is hope after all.

  13. says

    That’s a pretty cool infographic. :-) We already got our tax refund this year and I created a RISE plan for it. R- replace some of the money we borrowed to pay for FinCon12. I- invest. S- save money for next year’s Europe trip. E- experiment, my husband is getting to learn about stocks and play around with them.

    So far, I’m thrilled with the plan; it’s much better than blowing it on electronic toys like we did a few years ago.

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