In 2024, those who filed their taxes early received an average refund of $1,395. This amount is significant, but it’s $568 less than the average refund at this point last year. The IRS estimates that around 96 million taxpayers will receive a refund this year. Most of us hope for a refund each year, and a large refund can be exciting. It’s always nice to see an extra $1,395, or last year’s average of $1,963, in our bank account.
Many people use their tax refund to pay for a vacation or pay down credit card bills. While this is undoubtedly a good way to spend your refund, it’s important to remember that you have essentially given the IRS a large, interest-free loan. Consider reducing the amount withheld from your paycheck each month; you will have more money in your pocket. This is money that you have control over and can use to reduce interest payments or put into an interest-bearing account.
Let’s say you’re eligible for an average tax refund this year, which is $1,395. This amount is equal to about $116.25 per month. Now, suppose you spent around $1,000 on Christmas shopping last year and had to use your credit card to pay for it. If you have good credit, you might be charged an average interest rate of 16.25% on the balance you owe. But if your credit score is not great, your interest rate could be between 24% and 29%.
To pay off your debt before next Christmas, let’s assume you’ve decided to set aside $100 every month. This chart shows how much interest you’ll have to pay each month, based on your balance and interest rate.
| Month | Beginning Balance | Payment | Interest | Principal | Ending Balance |
| January | $1,000 | $100 | $13.54 | $86.46 | $913.54 |
| February | $913.54 | $100 | $12.37 | $87.63 | $825.91 |
| March | $825.91 | $100 | $11.18 | $88.82 | $737.09 |
| April | $737.09 | $100 | $ 9.98 | $90.02 | $647.07 |
| May | $647.07 | $100 | $8.76 | $91.24 | $555.83 |
| June | $555.83 | $100 | $7.53 | $92.47 | $463.36 |
| July | $463.36 | $100 | $6.27 | $93.73 | $369.63 |
| August | $369.63 | $100 | $5.01 | $94.99 | $274.64 |
| September | $274.64 | $100 | $3.72 | $96.28 | $178.36 |
| October | $178.36 | $100 | $2.42 | $97.58 | $80.78 |
| November | $80.78 | $80.78 | $80.78 | $0 | |
| Total Interest | $80.78 |
Paying off credit card debt can be a tough challenge for many people. For example, imagine if it took you almost a whole year to pay off your credit card debt; during that time, you ended up paying an extra $80.78 in interest charges. Unfortunately, this is a common problem that many Americans face. In fact, as of September 2023, around one-third of all Americans were still struggling to pay off the credit card debt they accumulated during the Christmas season of 2022.
Now, let’s look back to January 2023. You use the IRS tax calculator, and it reveals that you are having too many taxes withheld. You lower your withholding amount to match your expected tax liability, giving you an extra $116.25 each month. Add this to the $100 you had budgeted to pay off your $1,000 Christmas credit card debt. The table below shows the results.
| Month | Beginning Balance | Payment | Interest | Principal | Ending Balance |
| January | $1,000 | $216.25 | $13.54 | $202.71 | $797.29 |
| February | $797.29 | $216.25 | $10.80 | $205.45 | $591.84 |
| March | $591.84 | $216.25 | $8.01 | $208.24 | $383.60 |
| April | $383.60 | $216.25 | $5.19 | $211.06 | 172.54 |
| May | $172.54 | $172.54 | $172.54 | $0 | |
| Total Interest | $37.54 |
This plan would enable you to pay off your Christmas debt in just five months instead of eleven months. By doing so, you would have saved $43.24 in interest. Moreover, you would have an additional $43.71 in May and an additional $216.25 in each of the next seven months. This would have given you a total of $1,556.99 that you could have utilized to pay for Christmas 2023, along with an additional $557.
It is not possible to change your withholdings for 2023 after the fact. However, you can make changes right now. Assuming you began 2024 with $1,000 in debt from holiday spending and budgeted $100 to reduce it, and your accountant filed your taxes on time, you have received a refund of $1,395 this week. You can use $647 of this amount to clear your debt balance (as indicated in the first table above). As a result, you will have $648 left from your refund. Additionally, you can modify your withholding now to receive an extra $116.25 monthly for the remainder of the year.
If you add the $100 you have budgeted every month to put towards your debt and the $116.25 you have available, you will have an extra $216.25 per month. By saving this amount for eight months, in addition to the $648 lump sum, you will have a total of $2,378 by the end of 2024. It’s important to note that you won’t receive a large tax refund in 2025, but you’ll have the money available throughout the year. You can use this money to pay off debt, fund a nice vacation, or cover Christmas 2024 expenses without incurring new debt.
This plan assumes that you will maintain your current spending levels for regular and Christmas expenses. On the other hand, if you are likely to fritter away the extra money and not save it for your Christmas spending, then you will be better off to maintain your current level of withholdings.
For more tips on managing money wisely, please see my other blogs. My Bible study, Honoring God with Your Money, is an excellent resource.
Susan's Reflections 