If inflation has eaten away at your budget the way waves erode a beach, then your tax refund might just provide a much-needed protective barrier.
As of March, prices are up 6% over the past 12 months, according to the most recent consumer price index. At the same time, just over half of filers (55%) are expecting tax refunds for the 2022 tax year, with an average expected refund of $2,205, according to the 2023 Nerdwallet Tax Report. Financial experts say consumers can use that windfall — which is really just a delayed paycheck that you already earned — to help offset the strain of those higher prices.
“Tax refunds are going to arrive at just the right time for many consumers this spring,” says Drew Wessell, a certified financial planner at Fiduciary Financial Advisors in Grand Rapids, Michigan.
UNLOAD HIGH-INTEREST DEBT
With rising interest rates, variable-rate debt becomes more expensive — including credit cards. That’s why many financial experts put paying off debt at the top of the priority list, even considering it a type of investment.
“Using your tax refund to pay off a credit card debt with a 20% interest rate gives you an instant, tax-free 20% return on that investment. It’s not a creative idea, but the math makes it the most impactful action that a consumer can take,” Wessell says.
SAVE IN A HIGH-YIELD ACCOUNT
Rising rates also mean rising yields on savings accounts, so you can save your refund and earn more on it. “If you already have a high-yield savings account, you can also look at CDs,” says Marguerita Cheng , a certified financial planner and the founder of Blue Ocean Global Wealth in Gaithersburg, Maryland. CDs, or certificates of deposit, offer higher yields in exchange for less liquidity.
Wessell advises saving enough to start or boost an emergency fund, which could help you in the event of a sudden unexpected expense or job loss. “Life is full of surprises, and having an emergency fund helps you avoid going into another debt spiral,” he says.
FUND LONG-TERM GOALS
Because higher prices have cut into long-term savings goals like retirement and college, a refund can offer an opportunity to get back on track, Cheng says. “You don’t have to put a lot in, but it can be the seed money,” she adds, noting that her son is using his first refund as he begins his career to open a Roth IRA.
Similarly, you could take care of other delayed financial tasks, such as buying life insurance. “Revisit your family situation,” Cheng urges, especially if you have younger children.
How to use a tax refund to fight inflation
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As we progress through the 2023 tax season, many Americans have their eyes on a potential tax refund. But getting money back from the government can actually be a double-edged sword.
Earning a large tax refund may mean that you gave Uncle Sam an interest-free loan throughout the course of the year instead of putting that money to work for you in other ways.
Still, the majority of people who file a U.S. tax return every year end up getting a refund. For the 2021 tax year, which involved tax returns filed in 2022, U.S. individual taxpayers logged an average federal refund of $1,798.
To determine where taxpayers receive the largest refunds, SmartAsset analyzed the average dollar amount of 2021 federal tax refunds for all 50 states and the District of Columbia. Though it did not play a role in our rankings, the analysis also examined state and local income tax refunds for tax year 2020.
For details on our data sources and how we put all the information together to create our final rankings, you can read more in the Data and Methodology section below.
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As we progress through the 2023 tax season, many Americans have their eyes on a potential tax refund. But getting money back from the government can actually be a double-edged sword.
Earning a large tax refund may mean that you gave Uncle Sam an interest-free loan throughout the course of the year instead of putting that money to work for you in other ways.
Still, the majority of people who file a U.S. tax return every year end up getting a refund. For the 2021 tax year, which involved tax returns filed in 2022, U.S. individual taxpayers logged an average federal refund of $1,798.
To determine where taxpayers receive the largest refunds, SmartAsset analyzed the average dollar amount of 2021 federal tax refunds for all 50 states and the District of Columbia. Though it did not play a role in our rankings, the analysis also examined state and local income tax refunds for tax year 2020.
For details on our data sources and how we put all the information together to create our final rankings, you can read more in the Data and Methodology section below.
Four income-tax-free states rank in the top 10. These states are Wyoming, Texas, Alaska and South Dakota. (In total, nine states have no income tax.) Wyoming residents saw refunds of $1,802. Texas residents took home $1,783. Alaska taxpayers had refunds of $1,734. For South Dakota, the average refund totaled $1,721. For context, the national average tax refund amount in 2021 was $1,798.
Nationally, there was a $417 decrease in average federal tax refunds between 2020 and 2021. The COVID-19 pandemic inspired special tax benefits for the 2020 tax year, which could explain the drop in average refunds. In 2021, the U.S. had more than 600 million tax returns with federal tax refunds, compared to more than 303 million in 2020.
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Four income-tax-free states rank in the top 10. These states are Wyoming, Texas, Alaska and South Dakota. (In total, nine states have no income tax.) Wyoming residents saw refunds of $1,802. Texas residents took home $1,783. Alaska taxpayers had refunds of $1,734. For South Dakota, the average refund totaled $1,721. For context, the national average tax refund amount in 2021 was $1,798.
Nationally, there was a $417 decrease in average federal tax refunds between 2020 and 2021. The COVID-19 pandemic inspired special tax benefits for the 2020 tax year, which could explain the drop in average refunds. In 2021, the U.S. had more than 600 million tax returns with federal tax refunds, compared to more than 303 million in 2020.
States in the Midwest and West appear most often for offering the most funds back to tax payers, with Texas and Alaska also ranking high.
1. Utah
Utah's average federal tax refund for 2021 was $1,812. With 5.4 million tax refunds issued, the state's average may have benefited from boosted tax credits for children as the average household size was higher for 2021 in Utah than in any other state.
2. Wyoming
Wyoming is the first state on the list without a state income tax. The average federal tax refund in 2021 was $1,802. This was calculated from only about 1 million federal tax refunds issued. The state had the fewest number of tax refunds issued out of all states in 2021.
3. Texas
Texas is another state with no state income tax. Residents received an average federal tax refund of $1,783 in 2021. Texas received the second-largest total refund amount (nearly $94 billion) of all states, with only California getting more total refund dollars.
4. North Dakota
North Dakota comes in fourth with an average federal tax refund of $1,750 in 2021. The government issued nearly 1.4 million refunds. The average state and local tax refund is less than half the federal figure at $820.
5. Illinois
Illinois ranks fifth with an average federal refund of $1,739. Illinois also had the second-lowest average state and local tax refund out of all states in 2020. It was just $581. Only Pennsylvania had a lower average refund ($534).
6. Alaska
Alaska is the third state on the list without a state income tax. It received an average refund of $1,734 in 2021. The federal government issued more than 1.3 million refunds that tax year.
7. Kansas
Kansas comes in seventh, right behind Alaska with an average federal tax refund of $1,728. More than 5 million refunds went to Kansas taxpayers in 2021.
8. South Dakota
South Dakota is the last state in the top 10 without a state income tax. The state had the fourth-fewest number of total tax refunds issued (1.6 million) in 2021, behind Wyoming, North Dakota and the District of Columbia. The average federal tax refund was $1,721.
9. Nebraska
Nebraska comes in ninth with an average federal tax refund of $1,716 in 2021. This was calculated from more than 3.4 million refunds issued that year.
10. Oklahoma
Oklahoma rounds out the top 10 on the list with an average federal refund amount of $1,715, just $1 behind Nebraska and $3 higher than a three-way tie for 11th place between New York, Tennessee and New Jersey.
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States in the Midwest and West appear most often for offering the most funds back to tax payers, with Texas and Alaska also ranking high.
1. Utah
Utah's average federal tax refund for 2021 was $1,812. With 5.4 million tax refunds issued, the state's average may have benefited from boosted tax credits for children as the average household size was higher for 2021 in Utah than in any other state.
2. Wyoming
Wyoming is the first state on the list without a state income tax. The average federal tax refund in 2021 was $1,802. This was calculated from only about 1 million federal tax refunds issued. The state had the fewest number of tax refunds issued out of all states in 2021.
3. Texas
Texas is another state with no state income tax. Residents received an average federal tax refund of $1,783 in 2021. Texas received the second-largest total refund amount (nearly $94 billion) of all states, with only California getting more total refund dollars.
4. North Dakota
North Dakota comes in fourth with an average federal tax refund of $1,750 in 2021. The government issued nearly 1.4 million refunds. The average state and local tax refund is less than half the federal figure at $820.
5. Illinois
Illinois ranks fifth with an average federal refund of $1,739. Illinois also had the second-lowest average state and local tax refund out of all states in 2020. It was just $581. Only Pennsylvania had a lower average refund ($534).
6. Alaska
Alaska is the third state on the list without a state income tax. It received an average refund of $1,734 in 2021. The federal government issued more than 1.3 million refunds that tax year.
7. Kansas
Kansas comes in seventh, right behind Alaska with an average federal tax refund of $1,728. More than 5 million refunds went to Kansas taxpayers in 2021.
8. South Dakota
South Dakota is the last state in the top 10 without a state income tax. The state had the fourth-fewest number of total tax refunds issued (1.6 million) in 2021, behind Wyoming, North Dakota and the District of Columbia. The average federal tax refund was $1,721.
9. Nebraska
Nebraska comes in ninth with an average federal tax refund of $1,716 in 2021. This was calculated from more than 3.4 million refunds issued that year.
10. Oklahoma
Oklahoma rounds out the top 10 on the list with an average federal refund amount of $1,715, just $1 behind Nebraska and $3 higher than a three-way tie for 11th place between New York, Tennessee and New Jersey.
While getting a large tax refund may feel like scoring free money, keep in mind that getting little to no refund may not necessarily be a bad thing.
"That money may have been working harder for you by gaining interest in a bank account, earning returns in an investment fund or paying for living expenses," says Susannah Snider, certified financial planner and managing editor for financial education at SmartAsset.
Employees may consider adjusting their tax withholding on their form W-4 to take more money home each month and receive a smaller refund at tax time. "Especially in an environment of rising interest rates, it's worth it for workers to consider adjusting their withholdings to reduce their tax refund amount and keep more money in their pockets throughout the year," Snider says.
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While getting a large tax refund may feel like scoring free money, keep in mind that getting little to no refund may not necessarily be a bad thing.
"That money may have been working harder for you by gaining interest in a bank account, earning returns in an investment fund or paying for living expenses," says Susannah Snider, certified financial planner and managing editor for financial education at SmartAsset.
Employees may consider adjusting their tax withholding on their form W-4 to take more money home each month and receive a smaller refund at tax time. "Especially in an environment of rising interest rates, it's worth it for workers to consider adjusting their withholdings to reduce their tax refund amount and keep more money in their pockets throughout the year," Snider says.
To find the states with the largest tax refunds, SmartAsset examined data for all 50 states and the District of Columbia, focusing on two data points:
The total dollar amounts of federal tax refunds. This is how much each resident receives in a refund, on average, taken by dividing the total amount refunded in the state by the total number of refunds.
The total dollar amounts of state and local tax refunds. This is the amount each resident received as a refund from filing their state taxes, dividing the total amount refunded in the state by the total number of refunds submitted.
For each state, we divided the total dollar amount of federal tax refunds by the number of federal tax refunds issued in that state. The result represents the average federal tax refunds. We used this dollar figure for each state to rank the entire list from highest to lowest.
All data comes from the IRS. Federal tax refund data is for the fiscal year 2021 while state and local income tax refund data is for the tax year 2020.
This storyoriginally appeared onSmartAssetand has been independently reviewed to meet journalistic standards.
Canva
To find the states with the largest tax refunds, SmartAsset examined data for all 50 states and the District of Columbia, focusing on two data points:
The total dollar amounts of federal tax refunds. This is how much each resident receives in a refund, on average, taken by dividing the total amount refunded in the state by the total number of refunds.
The total dollar amounts of state and local tax refunds. This is the amount each resident received as a refund from filing their state taxes, dividing the total amount refunded in the state by the total number of refunds submitted.
For each state, we divided the total dollar amount of federal tax refunds by the number of federal tax refunds issued in that state. The result represents the average federal tax refunds. We used this dollar figure for each state to rank the entire list from highest to lowest.
All data comes from the IRS. Federal tax refund data is for the fiscal year 2021 while state and local income tax refund data is for the tax year 2020.
This storyoriginally appeared onSmartAssetand has been independently reviewed to meet journalistic standards.
In many real estate markets, rising home prices along with the higher interest rates make it harder to buy your dream home. Instead, use your refund to improve your current home, suggests Ryan Greiser, a certified financial planner and the founder of the financial firm Opulus in Doylestown, Pennsylvania. New flooring, energy-efficient appliances or improved windows can boost your home’s energy efficiency as well as increase its value.
“We love the idea of people loving the space they live in,” Greiser says, especially when they’re priced out of buying a new home.
For your outdoor space, invest in a chicken coop and gardening supplies to harvest eggs and vegetables — all of which have become pricier at the grocery store — suggests Tim Melia, a certified financial planner who is the principal and financial planner at Embolden Financial Planning in Seattle. If you have neighbors with skills such as carpentry, you could barter with them for additional savings.
CREATE MORE INCOME
Remodeling a room in your home to create a rental unit could generate income that helps offset inflation for years, says Melia, who operates a couple of short-term lodging options through vacation rental website Airbnb. He says upfront investments could include better furniture and decor: “You want to be able to stand out.”
Similarly, investing in yourself by taking classes for a new skill or certification could increase your income. “It increases your potential to earn and can allow you to step into a more lucrative career or take the next step in your existing career,” Melia adds.
FIND SMALL WAYS TO TREAT YOURSELF
While air travel and other bigger splurges might be prohibitively expensive, your refund can give you more affordable pleasures, even after taking care of other priorities, Cheng says. She indulges in listening to audiobooks (most recently “Spare” by Prince Harry). “I was getting anxiety watching the news at the gym, so instead, I listen to audiobooks,” she says.
ADJUST YOUR WITHHOLDINGS
Lastly, if you’re receiving a refund, it means you overpaid taxes in 2022. You might be better off adjusting your withholdings so you receive more in each paycheck instead. “If you’re getting more than $3,000, then you probably want to revisit your withholdings because that could be $200 to $300 a month,” Cheng says.
And that could help offset those higher gas, restaurant or grocery bills all year long.
This column was provided to The Associated Press by the personal finance website NerdWallet. The content is for educational and informational purposes and does not constitute investment advice.
METHODOLOGY:
This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from Dec. 6-8, 2022, among 2,041 U.S. adults 18 and older, among whom 1,777 will file a 2022 federal tax return. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.8 percentage points using a 95% confidence level.
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