Every year, studies are conducted on how Americans spend their tax refunds. But this year, a new tax law went into effect that you might think would change those results…if people actually knew about it. However, since most Americans are confused or ill-informed about tax reform, those spending plans might have to change. So, how do taxpayers plan to spend their refunds, and how might the recent reforms affect those expectations?
How will Americans spend their tax refunds?
From paying off debt to saving money or going on a vacation, the answer to that question varies depending on who you ask. For example, a recent Freedom Debt Relief survey showed that 42% of women and 40% of men of all generations stated they would use their refunds to pay off debt. An additional 27% of women and 24% of men said they would sock the money away into a savings account.
42% of women and 40% of men of all generations stated they would use their refunds to pay off debt.
Can your tax refund fix your finances?
No matter how they plan to use their money, many Americans see tax refunds as a much-needed cash infusion that will help them manage their finances. But unfortunately, while a majority of the survey’s respondents stated that they would use their refund to pay off debt, 42% of people said that they have about the same amount of credit card debt this year as they did last year. Similarly, a combined 54% stated that they would find it difficult (32%) or very difficult (22%) to pay for an unexpected $500 expense. And yet, only 26% plan to put their tax refund toward savings.
While your tax refund usually can’t fix your financial woes, it can make a dent if it’s part of a detailed, thoughtful plan grounded in the realities of your particular situation.
Are Americans informed about tax reform?
Speaking of reality, it’s important to know how recent changes to tax law could affect your refund. Unfortunately, while these reforms made headlines over the past year, many Americans may remain uninformed about how the new tax rules could affect them. In fact, 37% of people felt they were not at all informed about the 2018 Tax Reform. An additional 43% stated they were only slightly informed.
And, despite the U.S. Government Accountability Office’s (GAO) warning that taxpayers should reassess their 2018 withholdings, only 15% of Americans said they had changed their withholdings. So, now a majority of people of all generations still think that their tax refunds will be about the same as last year. And some will be disappointed.
Tax reforms that could affect your refund
So, what are some of the changes that could alter how Americans spend their tax refund this year? To sum it up, the new law lowers tax rates in most brackets, doubles the standard deduction, and overhauls many old tax rules. If you haven’t had a chance to file your taxes yet, here is an overview of some of the biggest changes happening this tax season:
- The standard deduction, also known as the amount of income that is not subject to income tax, has increased this year. For single filers, it is now $12,000. For joint filers, it is $24,000. For the head of the household, it is $18,000.
- Many itemized deductions have been suspended this year, including investment expenses, alimony deductions, personal casualty and theft losses, and mortgage interest deductions.
- Personal exemptions, or the amount you can deduct for yourself and your dependents, have been eliminated.
- Tax rates have changed as much as 4% in each tax bracket.
In sum, it’s great to have a spending plan for your tax refund, especially one that involves paying off debt. However, it’s also important for that plan to be one based in reality — the realities of your financial situation, and of the tax laws affecting the amount of your refund.
Get help planning your financial future
Making the decision to take control of your finances and get out of debt is a great first step toward a more stable financial future, whether your tax refund is involved or not. And luckily, learning how to deal with debt, money, and planning for that future doesn’t need to be hard. To that end, we’ve developed a simple to follow guide to help you find the tools you need to move to a better financial future. Get started by downloading our free guide right now.