Millennials are about to get millions of dollars from the IRS. What they plan on doing with it may tell us whether they will be the frugal types they are sometimes credited with, or will follow in the free-spending footsteps of the generation before them.
Most young taxpayers who receive employment-based income (form W-2) end up being eligible for a tax refund. The primary reasons are that as young adults, their income is likely subject to tax withholding by their employer, their incomes are lower overall, they may have deductions and credits based on education costs and children, and their income sources are less likely to be as diversified as a more mature adult who may have income from investment and other non-employment sources.
The financially savvy ones should consider investing some or all of their refunds, according to MaryAnn Monforte, a Professor of Accounting Practice at the Martin J. Whitman School of Management’s online graduate program. Here are some pointers she offers to those receiving refunds:
- Paying off credit cards. The number one way taxpayers should spend their refund checks is by paying off high interest rate credit cards. You want to focus on extinguishing the department store debt and revolving credit accounts.
- You’re never too young to save for retirement. Chances are, at their income levels, millennials haven’t maxed out their 401K contributions, for example. Most millennials also fall into the income range allowing them to take advantage of the Roth IRA. That is one savings vehicle that is tax-free growth and it might not be around long, so take advantage now!
- Student loans. Many millennials have student loans and even though the interest rates are not that high on student loans, paying them off early allows you to free up cash. You want to get rid of debt to help position yourself for future investments, such as buying a house or a car.
- Save for future investments. If you are lucky enough to have minimal debt, set some of your tax refund aside for future expenses, such as a down payment on a house.
However, according to a recent Carnegie Mellon University survey, most millennials say they would spend their refund, with most men expecting to purchase electronics, and women considering apparel. Only about five percent plan on using the cash to do one of the above four tips.
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Tags: Income Tax, IRS, Staffing
