One of the byproducts of the country’s response to the coronavirus pandemic was to delay the deadline for filing federal income tax returns until July 15. That provided individuals across the United States with an additional three months to submit their returns to the Internal Revenue Service. It also delayed the receipt of income tax refunds for millions of individuals who took advantage of the extension to file their returns.
When looking at data provided by the IRS, there were only 116 million returns that had been received by the IRS as of April 17, 21 million fewer than were filed at the same point of last year. By the end of July, the number of returns that had been filed had increased to nearly 153 million. That means that 37 million returns were filed between April and July 2020. Intrerestingly enough, the average tax refund was the same in 2020 as it was in 2019 — $2,741 per return.
Any list of how individuals should spend their tax return includes paying off old debts at or near the top of the list. This article, for example, calls paying off old credit card debt the equivalent of “buying your financial freedom.” This article lists paying down existing debt as the top thing individuals should do with their returns. This article says that paying down debt is a better way for individuals to spend their tax returns instead of anything else, including putting it in the bank.
It might not sound like a lot of fun to use the windfall of an income tax refund to pay off old debts, but the investment can pay huge dividends. NerdWallet, for example, calculated that using a $2,200 income tax refund to pay off credit card debt can save an individual nearly $3,600 in interest payments, had the individual continued to make minimum monthly payments instead. That is an investment that pays off in a big way for anyone with credit card debt.
Income tax refunds are important to a lot of Americans. A survey from earlier this year disclosed that 68% of respondents say their tax refund is either “somewhat” or “very” important to their financial situation. In that survey, most people said they were going to put their tax refunds in the bank, followed by those who said they were going to pay down their debts.