Two-thirds of filers receive a tax refund each year, but are big tax refunds good or bad? They can be both. Depending on the filer, a big tax refund can be good if the money Uncle Sam held on to during the year is used to pay down debt or is invested in a 401k or IRA. Tax refunds can also be given away to charities. High-net-worth individuals may consider donor advised funds to invest with the sole purpose of supporting charitable causes.
A big tax refund can be bad if the filer receives the check and spends it on something wasteful like a designer handbag when they have bills to pay. Considering the individual overpaid on taxes during the year, resulting in less money to live on, frivolous spending of a tax windfall is very bad. The compromise could be buying a designer handbag at an outlet mall for $100 then putting the remainder of the refund to smarter use.
When a couple filing jointly receives a big tax refund and forgoes paying down debt to splurge on a family trip, their financial problems only worsen. Instead of blowing the entire tax refund on fun, focus the majority on bills and then take a one-tank trip on a weekend. Life is about balance. You can’t work and not play, and you can’t spend and not save. If you have questions about tax planning, written financial plans, or investment management, call Alloy Wealth at 800-689-3935.