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TopCashback.com

Tax season is upon us… and while some will be receiving a surprise tax bill (again) others are anticipating a refund check. But do Americans actually understand how taxes work?

Well, a recent survey conducted by TopCashback.com, the USA’s most generous cashback site, found that although one in four (25 percent) Americans don’t comprehend how taxes are determined, 85 percent do know where their tax refunds come from.

Tax Season, Stress Season.

While 56 percent of respondents look forward to tax season, 46 percent admit that filing taxes is stressful.

Do you file taxes early?

  • Yes (67 percent)

  • No (33 percent)

How will you file your taxes this year?

  • Via a tax software program or websites like TurboTax or H&R Block (58 percent)

  • Via professional help from an accountant or tax preparer (32 percent)

  • Manually by filling out forms and following the instructions provided by the IRS (Six percent)

  • Choose not to file taxes (Three percent)

Last Year vs. This Year

Refund checks are never guaranteed — especially after last year’s tax reforms, which left 30 million people owing Uncle Sam — so it’s no surprise that 24 percent of Americans adjusted their tax withholdings after last year.

Did you receive a tax refund last year?

  • Yes (70 percent)

  • No (30 percent)

What do you expect this year?

  • A tax refund (79 percent)

  • A bill from the IRS (21 percent)

Top strategies used to avoid going into the next tax bracket:

  • None — couldn’t do anything to avoid going into the next tax bracket (53 percent)

  • Maximized 401(k) contributions (28 percent)

  • Increased retirement contributions (21 percent)

  • Made an extra mortgage payment (Nine percent)

Tax Refund Plans

For many Americans, the annual check from Uncle Sam offers them a chance to better their finances, while some may have other plans in-sight.

Top tax refund plans:

  • Pay off debt (43 percent)

  • Put it towards my savings (37 percent)

  • Invest it (Nine percent)

  • Make a big purchase (Five percent)

  • Take a trip (Five percent)

With 79 percent of respondents expecting a tax refund this year, here are the best (and worst) ways to spend your refund from Rebecca Gramuglia, Personal Finance Expert at TopCashback.com.

Wise ways to spend your tax refund:

  1. Pay off consumer debt. Consumers may find themselves on an endless cycle when it comes to debt, due to interest and frivolous spending habits. The best way to put your refund check to good use is by paying off any high-interest debt first to save money in the long run.

  2. Contribute to your emergency fund. You can never be too prepared for the unexpected. Instead of spending your tax refund, put it away for a rainy day. Having an emergency fund is the best way to prepare for any unexpected and urgent expenses while limiting the impact on your day-to-day budget. An emergency fund is a financial cushion stashed away that you can turn to if an expense occurs that you’d otherwise find hard to fund from your paycheck, ranging from medical bills to emergency pet care to the loss of a job.

  3. Invest in yourself. It is worthwhile to use your tax return for something that is considered an investment, and the best investment you can make is in YOU. Investing in yourself is actually the simplest, least risky and most profitable option you can choose. Improve your income-earning ability by taking a course or two to invest in your future. Acquiring certain certifications or skills can ultimately result in an increase in pay and promotions. Expand your knowledge and watch your investment grow with time.

Foolish ways to spend your tax refund:

  1. Gambling away your refund. With extra cash in your pocket, you might be tempted into gambling your refund away with the hope you’ll double your money. But the casino is the worst place to try to turn a profit. You could actually blow your whole tax refund in no time and get nothing in return. Stay away from gambling altogether and instead, find better ways to invest your money or use it for necessities.

  2. Lending money to family and friends. Receiving a hefty refund check could make you want to financially help relatives or friends in need. But be aware that just like yourself, others receive a tax refund as well. Before you lend someone money consider if you’re in the financial position to be someone’s private lender (without taking your tax refund into account).

  3. Spontaneous purchases. Don’t blow your tax refund on a shopping spree. Keep in mind, if you didn’t need it before the refund, you probably don’t need it now. Stay away from any purchases that lose value quickly and stick to purchasing items that are considered investments or could save you money in the long run. A coffee machine, for example, is a great investment that could save you money on costly coffee runs. The money you save could eventually equal the value of the coffee machine.