Tax experts say to use refunds to pay off debts

March 31--Statistics released by the Internal Revenue Service show refunds totaling nearly $142.09 billion had been issued by the end of February to 46.53 million taxpayers, an average of $3,053.

Along with those refunds come questions about how that money might be spent. Of course, the temptation to splurge on something extravagant is always an option, but personal finance experts have offered other options that might prove smarter in the long run.

A recent survey conducted by TD Bank found about 20 percent of those who will get a refund check this year from Uncle Sam plan to use that money to pay toward the outstanding balance of a loan. Another 28 percent of the respondents reported they would use refunds to pay bills.

The survey of 1,213 taxpayers, which was conducted during the first part of March, found that 25 percent of those polled cited debt as the obstacle that posed the greatest challenge to saving their refunds. Paying down debt may not be the most sexy way to spend an unexpected windfall, but it will help those who do achieve a sense of financial security.

Personal finance experts say taxpayers should devise a debt-reduction strategy to maximize benefits. That strategy should include a list that identifies which debts should be paid down first and those from which taxpayers benefit -- home mortgages and many student loans are examples of advantageous debt.

Most experts agree that high-interest credit card debt should be at the top of a debtor's list. That can be one of the most expensive forms of household debt and will burden those who opt to make the minimum monthly payment.

The American Institute of CPAs, on its financial literacy website, recommends making lump-sum payments to quickly pay off high-interest credit card debt -- a sizable tax refund can help accomplish that task. The organization said it is important to pay off cards with the highest interest first.

"One way to potentially optimize payment of your debt is to first make the minimum payments required for each debt, and then allocate any remaining dollars to the debts with the highest interest rates," the organization recommends as part of its debt strategies. "If you make only the minimum payments, it may take a long time to pay off the debt, and you may have to pay large amounts of interest over the life of the loan."

Kevin Collins, president and chief executive officer of the Better Business Bureau that serves the Fall Line Corridor in parts of Alabama, Georgia and South Carolina, said if credit card debt is not a problem, then taxpayers should consider using a refund as part of a downpayment for a house, car or college tuition -- some larger financial goal.

Another alternative is to invest the refund in a retirement fund to achieve long-term objectives or some other investment account for short-term savings goals. Any savings not reserved for retirement, Collins said, can come in handy when an unexpected expense arises.

Reach D.E. Smoot at (918) 684-2901 or [email protected].

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