It’s tax refund time, and thanks to inflation adjustments, many Americans may get more back from Uncle Sam than they were anticipating. As of early April, tax refunds averaged $3,011, nearly 5% more than a year earlier, according to the IRS. Adjustments to inflation-indexed provisions of the tax code help explain the larger refunds: They included tweaks to the tax brackets and the standard deduction. So what should Americans do with their refunds? Pay down debt? Buy a gym membership? How about traveling abroad to take advantage of the strong dollar? For this week’s Barron’s Advisor Big Q, we asked financial advisors: How are you telling clients to use their tax refunds?
Andrew Crowell, vice chairman, wealth management, D.A. Davidson & Co.: Let’s assume it’s a middle-income household, and I guess that’s defined as $400,000 or less these days by our president. Then let’s say they’re getting a refund of $2,000 or $3,000, or maybe more. I would treat that refund as found money, where you’re thrilled to get it back. Take a third of it and do something fun. Reward yourself. Take friends to dinner, take a trip. I think rewarding oneself is a positive; it’s good reinforcement. Maybe you made a resolution in January to start a gym membership, but you never actually paid for it. Well, now you’ve got a little cash in your pocket that you weren’t expecting, so invest in yourself.
Maybe a client hasn’t updated their trust in a long time, and maybe cost was part of the issue. Maybe they have got beneficiary changes on charitable bequests that they have wanted to make. You could use some of that money to take care of that. Another option could be investing in a home improvement project that you’ve been postponing, or building up an emergency reserve for future unexpected repairs on the car or the home. I also challenge almost every client to give part of the refund away, to do something philanthropic. Maybe you could donate a…
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