Personal Finance

Tax Refund: What Are You Doing With Yours?


A tax refund is to many Americans what a bonus is to Wall Street bankers—it's the largest lump sum the average household sees all year.

So what to do with it?

The average refund is $2,700, and for two-thirds of taxpayers, that's more than a month's paycheck. The temptation to splurge can be great, but the American Tax & Financial Center unit of TurboTax finds that fewer than 10 percent blow the money on a vacation or something similarly fleeting.

(Read More: Cheating on Taxes Is Not Cool, Say Most Americans)

Despite Americans' reputation as reckless spenders, most do the responsible thing and use the money to build up savings (29 percent) or to pay down debt (40 percent). Indeed, there's no time of year when we do better at paying off our plastic.

And that's great, as far as it goes, says Michael Kitces, a financial planning specialist in Great Falls, Va. But he says the truly financially astute are not getting a tax refund at all—at least not a large one.

Investing Your Tax Refund

"A big tax refund means you gave a free loan to the government all year long, and they never even paid you interest," he said.

If you'd rather have access to that money and be collecting the interest yourself, Kitces said, go see your employer's human resources department and update your withholding by filing a new Form W4.

The longer you've been with your company, the more your withholding may be out of whack, as life changes such as marriage and children avail you of different tax provisions.

Seniors' income can fluctuate depending on factors such as market performance, depending on the retirement plan, Kitces says, and one shouldn't assume it will be the same from year to year.

(Read More: One Quarter of US Has More Card Debt Than Savings)

If you're a small-business owner and you expect a big refund, it's probably a good idea to schedule an appointment with your accountant.

Now is also an excellent time to get yourself prepared for 2013 so this time next year you might have a smaller refund but a healthier bank account.

In the meantime, what to do with the refund in the mail?

In addition to paying down debt, Kitces suggests tending to urgent car and home repairs and shoring up an emergency reserve of six-months' living expenses.

Andrew Johnson of GreenPath Debt Solution also advised investing in home energy efficiency, and if you have kids, considering a 529 college savings plan.

(Read More: How Your Kids Are Learning Not to Blow Your Cash)

Steve Siebold, author of "How Rich People Think," offers a different perspective. He suggests using your refund toward self-development.

"Two-thirds of America's rich are self-made, and the No. 1 investment they tell me they've made is in themselves," he said. "Books, seminars, online courses. After all, a new big-screen television isn't going to advance your financial future."

An unscientific survey over social media found few who admitted to frivolous intentions for their tax refunds. Instead, "truck repairs," "new computer for work," and "paying down the credit card bill" were on order.

And if tax season has you feeling sorry for yourself, consider the response of one Department of Justice worker cum sequestration victim: "We'll need it to pay bills in the event of a furlough."

By Matt Twomey; Follow @Matt_Twomey on Twitter.