What to Do With Your Tax Refund

NEW YORK (MainStreet) – Simply utter the words “Tax Day” to friends and they’ll likely respond with a cringe and some serious eye rolling. Yet despite the stress and drudge many associate with filing tax returns, there is a light at the end of all the paperwork: the glorious tax refund.

As MainStreet has reported, it isn’t exactly a good thing to get a large refund, because that just means Uncle Sam is handing back the money you loaned it all year – without paying you any interest. But many still prefer to receive that big, fat check in the mail anyway.

Last year’s average refund wasn’t too shabby, coming in at $2,985, according to the IRS. And Larchmont, N.Y.-based tax attorney Julian Block predicts this year’s refund to be "a shade over $3,000" on average, such as around $3,050.

Block says that it has generally been a trend that the average tax refund increases over time. One factor that might net you a big refund this year is if you were unemployed for part of 2011, then got hired later that year. “If someone was out of work for part of 2011 but started working again in, say, May, the employer is going to be withholding income taxes as if the person were making that salary for the entire year, so there’s going to be over-withholding,” he explains.

Although the tax deadline is still two months away, it’s not too early to start thinking about what to do with your refund if you get one.

Certified Financial Planner Rick Kahler of Kahler Financial Group in Rapid City, S.D., suggests exercising a little prudence.

“I would recommend people strongly consider applying their tax refunds to any credit card debt, as most credit card interest is in excess of 10%, making reducing your debt a wise investment,” he says. If you don’t have credit card debt, Kahler suggests contributing the money to your retirement account or a child’s college fund.