How Your Tax Refund Can Help Pay Debt
This year, the majority of taxpayers (68 percent) would prefer to pay down their debt with a tax refund instead of growing their personal savings, according to a recent poll by the National Foundation for Credit Counseling® (NFCC).
The NFCC poll found that some taxpayers will use their refunds to pay for basic necessities (15 percent). Others indicated they’d use the funds to grow their savings (11 percent) or to have fun shopping or take a vacation (2 percent). Just four percent of respondents did not know how they would use the refund.
While there are a number of good reasons to become less dependent on tax refunds, it is wise to have a plan ready. In 2014, the average tax refund for individual taxpayers was $3,034 according to the IRS. Compare that to the average credit card debt of $5,047 for adult consumers with credit cards in the previous year, according to a report by CreditCards.com. If the average refund amount were entirely committed to the repayment of the average credit card debt, it could pay it down by more than half.
The NFCC encourages taxpayers to consider the following tips when deciding how to repay debt with their refund:
- If the debt is costing more than what is being earned from interest on savings, debt repayment should be considered as the top priority.
- If committing the entire tax refund to repay a debt does not completely erase the balance owed, a plan should be in place to accelerate the payoff of the remaining balance.
- If using the refund to settle a debt for less than the balance owed, be prepared to pay income tax on the amount forgiven by the creditor.
- To pay less interest over time, focus on eliminating the higher interest debts first.
- Once a balance is repaid, avoid replacing it with new debt.
“The most important thing to consider is the impact that debt is having on quality of life,” says Bruce McClary, spokesperson for the NFCC. “Being in a position where savings has to be put on hold while debt takes center stage is not where consumers should be. Placing debt repayment on a faster track while reducing reliance on credit cards and loans will bring people closer to resuming progress toward reaching their personal financial goals.”