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Risk on using Tax Refunds to pay off bills and debt

Using your tax return to pay off debt is certainly an option, but is it the right choice for you? The answer depends on your personal circumstances. In some cases, immediate living expenses need to take precedence. In others, getting out of debt is a top priority. If that’s your situation, it’s OK to use your tax return to start the process. (Photo via

Although most Americans don’t enjoy filing their taxes, they eagerly anticipate their tax refunds to pay off bills and debt.

A recent GOBankingRates research of more than 1,000 respondents found that the majority of Americans anticipate receiving between a few dollars and $2,000 in tax refunds this year when they submit their returns. Another 14% anticipate receiving between $2,001 and $3,000 in refunds, and 12% anticipate receiving more than $3,000.

But many people will never get to enjoy the pleasant things that kind of money can purchase.

Using your tax return to pay off debt is certainly an option, but is it the right choice for you? The answer depends on your personal circumstances. In some cases, immediate living expenses need to take precedence. In others, getting out of debt is a top priority. If that’s your situation, it’s OK to use your tax return to start the process. (Photo via


Roughly one-third of people want to save or invest their refunds, while considerably lower numbers will spend them on self-indulgent purchases like holidays or other luxuries. The majority, or around 4 in 10, will, however, have to spend their tax refunds on debt repayment and other expenses rather than enjoying them.

The survey’s findings, according to Colin Palfrey, CEO of the personal finance website Crediful, show a significant change from prior years.

He noted that most people may typically use at least a portion of their refund for activities other than paying debts. “We frequently view a tax refund as a windfall, but in reality, it should be used to treat ourselves to something fun.”


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But the abrupt turnaround is not difficult to explain given how the previous year put America through the financial wringer — but it is disturbing.

It’s not shocking, according to Palfrey, that most people use their tax refunds to pay for bills; debt, and other living expenditures. But it’s very concerning. We are all in a situation where our financial concerns are all centered around getting by at our current level due to the current cost of living.

He talks about the four-decade-high inflation that, although rising interest rates made borrowing money more expensive, spent much of last year eroding household wealth.

Palfrey stated, “If we have to utilize the tax refunds to preserve that, so be it. But, the fact that we cannot rely on our monthly income to cover all of our expenses is slightly concerning.

Family Fundamentals: Use your tax refund to pay off debt and save

Normally when we get our tax refund, we end up spending most or all of it on something we’ve wanted for a long time but couldn’t afford. But over the past year, we’ve had some major unanticipated expenses. This year, should we use the refund to pay down our credit cards, or would it be better to build up our emergency fund? (Photo: iStock)


Lei Han, Ph.D., a CPA, associate professor of accounting at Niagara University, and a member of the American Accounting Association, is not surprised by the survey’s findings.

She explained why 2022 was a special year for millions of taxpayers for all the wrong reasons.

Han stated that the Social Security tax salary base has increased for the 2022 tax year and that some pandemic-related credits and deductions have been eliminated. “In 2022, the Child Tax Credit goes back to a $2,000 cap. In 2022, the EITC returns to $500. The child and dependent care tax credit was $8,000 in 2021 but has been reduced to $2,100 for 2022. The $300 deduction — $600 for married couples — for above-the-line charitable contributions is eliminated for taxpayers who do not itemize in 2022. There was no stimulus cheque after 2021, and the Social Security tax wage base has increased for 2022 to $147,000 from $142,800.

These pandemic-era perks and others enabled people to pay their debts and expenses while still having some money in their returns to save, invest, travel, or treat themselves.

However, they all vanished simultaneously in 2022.

The average tax refund so far this year is $3,125—here’s why you should use yours to pay off your credit card

Latest data from the IRS shows that American taxpayers thus far are seeing an average refund amount of $3,125. While you may feel inclined to spend what feels like “free money” (it’s actually money you overpaid the government in 2019) splurging on a vacation or a luxury purchase for its instant gratification, you’ll profit more in the long run if you use it wisely. (Photo via Getty Image)


Han used statistics from the Federal Reserve and the Bureau of Economic Analysis to help explain why so many people use their returns to pay off debt and unappealing bills.

The savings rate fell from the mid-30s to a record low of the low single digits by the end of 2022.

“The U.S. personal saving rate as a percentage of disposable personal income was about 2%-3% in the last few months, according to BEA,” Han added.

Millions of households that were once comfortably flush with cash are now living paycheck to paycheck, just as they did before the pandemic, and they are forced to use their tax refunds to pay off debt and obligations.


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Since most people required stimulus even before the virus, the pandemic was more of a godsend than a curse for millions of American households in terms of personal wealth. Just around 6 in 10 American families had enough cash or cash equivalent to meet a $400 emergency, according to a 2019 Federal Reserve Board research.

The proportion that could handle a crisis of four figures was substantially lower.

Millions of people received greater savings thanks to the stimulus payments in 2020 and 2021, but now, regrettably, things are returning to normal. According to a previous GOBankingRates poll, almost 50% of people have no emergency savings at all, and many others just have a few hundred dollars to cover an unanticipated disaster.

According to Andrew Lokenauth, founder of Fluent in Finance, “the trend serves as a testament to the precarious financial position of many households, indicating a shortage of savings to cover unexpected expenses and emergencies.” Lokenauth is a banking and investing expert who has held senior positions at Goldman Sachs, AIG, and other significant organizations. Additionally, it demonstrates how the economy affects families as a result of the combination of unstable economic conditions and slow income growth.

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