It's that time of year again — tax season! Many U.S. taxpayers are busy gathering their W2s, 1099-NECs, and other income and expense documentation from 2020 in anticipation of filing for a federal income tax refund. In 2020, the average federal income tax refund was $2,549. That kind of financial boost could close the gap to reach a specific financial goal.
Unless you consider your financial goals in advance, however, you could squander your refund and miss an opportunity to improve your financial situation.
If you expect to receive a tax refund this year, plan now for how to make the most of it.
How can I receive my tax refund?
You can receive your refund through a paper check that's mailed to you or by direct deposit into your checking or savings account. If you want your refund deposited into your bank account, you must provide the Internal Revenue Service (IRS) with the routing number and account number of the associated financial institution and account. As long as the bank account accepts electronic deposits, you can request a direct deposit of your refund. If you opt to wait for a paper check in the mail, deposit it using your mobile device if your bank or credit union offers this.
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What's the quickest way to receive my tax refund?
According to the Internal Revenue Service, filing electronically and having your refund direct deposited is the fastest, most secure way to receive your money. When you e-file your return, select direct deposit as your preferred refund method. If you file a paper return, simply enter your banking details under the Refund section of your tax form.
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You can even split your refund into multiple accounts (up to three) by making the designations in your tax software.
When will I receive my refund?
According to the IRS, taxpayers who file their returns electronically and provide the appropriate routing and account numbers should expect to see their return deposited to their designated account in less than 21 days. It can take up to eight weeks to have a refund check mailed to you.
Track the status of your refund using the IRS Where's My Refund? tool or the IRS2Go Mobile App, which you can download from Google Play, AppStore, or Amazon.
Remember that as tax laws and your financial situation changes, so might your eligibility for a tax refund. Even if you've received tax refunds in the past, there's no guarantee that you'll receive one this year.
Should I spend or save my tax refund?
Your tax refund could help kickstart your 2021 financial goals or help you cross the finish line to achieving one (or more) of the goals you're working toward. If you're having trouble deciding how best to use the funds, consider how your financial situation might benefit from a combination of spending and saving. Here are some options for financially savvy ways to use your tax refund:
- Grow Your Emergency Fund Account
Nothing has the potential to derail a savings plan like an emergency expense. A major auto repair, pet hospital visit, unexpected home repair, or other urgent expense can cause you to turn to high-interest rate credit cards to cover the cost. Use your tax refund to start or grow your emergency fund savings account so you'll have a no-interest source of money available when you need it.
The earlier you start saving for retirement, the longer your money can grow and benefit from compound interest. If you have an individual retirement account (IRA), consider applying your refund to the balance.
Save money over the long term by using your tax refund to pay off high-interest debt. If your refund isn't enough to completely pay off a credit card or loan balance, it can still lower the balance and help you save on interest charges.
Make saving a family affair by gaining input on how you should spend the refund. You may want to set a savings goal that would cover the cost of a stay-cation or a set of new paddle boards. Let your refund check be the first deposit toward your savings target.
Most importantly, remember that saving money should not be a once-per-year event. It’s most effective when you make a habit of saving a portion of all money that comes your way. Schedule auto-transfers from your checking account to your savings account each payday, and at this time next year you’ll be pleasantly surprised by how much it adds up.
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