You could be getting an extra $700 this year from the IRS in your tax refund

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Key Points
  • The average tax refund this year tops $3,500, up a whopping $700.
  • Still, nearly 3 in 10 people worry that their refunds won't get them very far this year because of fast-rising inflation.
  • "The nice thing to do with lump sums is, if you know you're going to spend it anyway, save it for [that expense] and then you don't acquire any debt," says one CFP.

Tax refund season is in full swing: As of February 18, the IRS has already dolled out more than 22 million tax refunds averaging a bit more than $3,500 apiece, according to agency data. That's a 33% jump in the number of refunds that had been returned at this same time last year, and an almost $700 increase in the average refund.

Despite the boost, 29% of people are worried that their tax refund won't get them as far it has done in the past, according to new data from Bankrate.

The culprit: Inflation. The consumer price index, one of the most common measures for gauging inflation, rose 7.5% year-over-year in January, according to the Bureau of Labor Statistics. It hasn't been that high since 1982.

"Inflation is the big elephant in the room that is really is starting to weigh on people," says Ted Rossman, senior analyst at Bankrate and CreditCards.com. "The past nine months it's probably been more psychological, but I think we're starting to see it more in the data."

'The tax refund used to be this once-a-year windfall'

Fortunately, fewer people are relying on their tax refund to get by this year.

Only 36% of Americans who are expecting tax refunds say it's very important aspect of their financial situation, according to new data from Bankrate. That's down six points from last year.

"The tax refund used to be this once-a-year windfall, but there have been a bunch of windfalls as of late," Rossman says, referring to government programs like the three rounds of pandemic stimulus checks and the advanced child tax credits from 2021. "There have been a lot of money drops over the past few years, so maybe people have gotten a little bit accustomed to it."

Even if fewer consumers think their tax refund will be important for their financial situation, that doesn't mean that money won't make a difference.

Earlier in the pandemic, the personal savings rate, which is the percentage of income people save, spiked several times, and overall credit card debt fell significantly. Now the personal savings rate is back to pre-pandemic levels and credit card debt jumped sharply in the fourth quarter of 2022, according to the Federal Reserve Bank of New York.

'The tried and true [advice] is to pay off your debt'

That rising inflation is one of the most important reasons that, this year more than ever, financial experts, including Rossman, are urging people to use their tax refunds wisely. In years past, families might have used their tax purchases to splurge on something, he says. This year, they may think twice about that as everything gets more expensive.

"People are going to continue to draw down their savings. They're going to continue to raise their debt [levels]," Rossman says, noting that in light of that, using a tax refund "to pay down credit card debt is perhaps the best use of all."

Credit cards already have some of the highest interest rates of any financial product, Rossman says, and they're likely to go higher once the Federal Reserve, the U.S. central bank in charge of interest rates, begins raising those rates in March.

Prices are going up: How inflation can affect you

Video by Courtney Stith

Paying down any existing credit card debt with your refund ahead of a rate hike can help you knock out your debt faster and pay less in interest overall.

Peggy Doviak, a certified financial planner and founder of DW Wealth Management in Norman, Oklahoma, agrees with prioritizing debt, but says she doesn't mind if people get a little creative with their tax refunds.

"The tried-and-true [advice] is to pay off your debt, create an emergency fund," Doviak says. "That's true, but there are other things that you can do with it."

Here's how tax brackets actually work

Video by David Fang

One suggestion: Set the money aside for a big expense that you know you have coming, like a summer vacation or camp for your kids, Doviak suggests. "The nice thing to do with lump sum is, if you know you're going to spend it anyway, save it for it and then you don't acquire any debt," she says.

If you don't have one big upcoming expense, Doviak suggests splitting your refund among a few different goals. For example, put some in your emergency fund, use a chunk to pay off some debt, and leave some for fun stuff.

When you break a windfall into pieces like that, she says, "you then give yourself permission to take some of that money and do something else with it, like maybe put it into that vacation fund or something like that."

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