Using Your Tax Refund as a Debt Consolidation Tool

Each year, millions of Americans waiting not-so-patiently for tax season, falling between the end of January through the tax filing deadline of April 15th. While no one particularly enjoys completing a tax return, the potential for a tax refund creates anticipation during the first few months of the year. A tax refund is a return of excess taxes paid throughout the year, of which many consumers use to pay for large expenses. One of the ways you can utilize your tax refund is to consolidate debt. To do this effectively, it is helpful to know how to estimate the refund you may receive during tax season, as well as the benefits and drawbacks of debt consolidation as a financial strategy.

How to Estimate Your Refund

Figuring out what you can expect for your tax refund isn’t a simple task, but there are several resources available online to help. Calculators that take only moments to fill out estimate your tax refund based on your income, your potential deductions or tax credits, and the amount of taxes you paid during the year. Additionally, tax refund statistics show that the average refund ranges between $2,769 and $2,940, depending on how a tax return was filed and paid. This can provide a gauge as to what you might anticipate for your refund – and what amount you can use for debt consolidation.

Debt Consolidation Benefits and Downsides

There are a handful of reasons to use your tax refund as your own debt consolidation loan, but not everyone sees past the immediate gratification of receiving a hefty deposit. For many, a tax refund is “found money,” meaning it is an extra source of funds that helps cover expenses above and beyond the normal day to day cost of living. When a refund comes in, some people will use it for splurging on a big-ticket item like a vacation or a new electronic purchase. Unfortunately, using a tax refund for expensive one-time purchases doesn’t help eliminate outstanding debt.

Benefits

Using a tax refund as a debt consolidation strategy can effectively benefit you in a few ways. First, taking a lump sum and paying off high-interest debt means you are no longer accruing and paying for interest charges each month. With the average credit card interest rate hovering around 15%, using a tax refund to pay off these amounts can save you hundreds if not thousands over the long haul.

Also, using a tax refund for debt consolidation helps reduce the number of payments you have to manage each month. If you have several credit cards or loans you are paying each month, you have as many due dates and monthly payments to manage. Using your tax refund to pay off one or more of these accounts eliminates a monthly due date and payment, making it easier to manage your cash flow from month to month.

Downsides

Although these are clear benefits of using a tax refund check for debt consolidation, there are some downsides as well. You no longer have access to the excess funds, which means big-ticket items or boosting savings account balances may be off the table. Also, it can be challenging to estimate your tax refund amount, and with tax laws in flux, you may receive less than you anticipated.

Summary

Using a tax refund as a way to manage your debt is a sound choice, especially when the interest on your debt or the monthly payments are difficult to manage. However, weigh this strategy against your need for the additional funds in the present moment. Finding a balance between debt consolidation and spending from tax refund dollars is often the best way strategy.

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