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Smart ways to use 2020 income tax refund

The 2020 income tax filing deadline will be here before you know it, and pretty soon you will be knee deep in paperwork and angrily cursing the IRS. In general, the historical average tax refund is between $2000 to $3000. That is a ton of money for low to moderate income families or those who were hit hard by the COVID pandemic, especially with a still uncertain economy. Find some ideas on how to use that tax return effectively.

We don’t think anyone likes completing their tax returns. But there is an upside to all that stress and uncertainty, and it comes when you find that the tax agency owes you a lot of money. Also, if you need help in preparing and filing your 2020 income tax returns, there are several assistance programs that can assist low to moderate income households.

Now that your 2020 state and/or federal income tax refund is on the way, it is time to do some additional planning. Spend time and be smart about how you will spend that governmental largesse. If you want to make the most of your tax refund this year, during this K-shaped economy, here are some tips to get you started.

How a low income family should spend their 2020 income tax refund

Retire Your High Interest Rate Debt With Your 2020 Refund. Many low to moderate income families as well as those in service industry type jobs have either lost their job or had their income reduced during as COVID hit the country. Those the “K-shaped” economy. In fact, there are between 10 to 15 million fewer jobs right now than when compared to last year. Families that were living paycheck to paycheck have often turned to using credit cards to pay the bills, and those credit cards may have interest rates of 10 to 18% or even more.

How would you like an instant 18% return on your tax refund money? If you use your newfound funds to pay off your credit card debt you could get just that. Paying off your high interest rate debt is perhaps the smartest use for your tax refund. What this means is put that return towards paying down (or eliminating any credit card bills) and you immediately earn 18% return on that “transaction”.

If your debts exceed your tax refund, tackling the balances with the highest interest rates is a good place to start. Then whenever you find yourself with some extra money, you can continue with your debt repayment program.

Rebuild Your Emergency Savings. Chances are that low income families, who have been hard hit by the COVID pandemic, have taken a major hit to their emergency fund. While the various stimulus checks may have assisted, those amounts are usually not enough to make up the difference to lose of income. After all, life is full of all kinds of emergencies, some of them financial and some of them societal. Now that you have some money coming in, why not use it to rebuild your emergency savings so you will be better prepared for the next financial storm?

Financial experts recommend having a minimum of six to twelve months’ worth of living expenses salted away. The pandemic showed everyone how important it is to have savings. If you do not have that much, using your tax refund to boost your savings is a very smart idea indeed. Find more on how to start emergency savings when a low income family.

Stretch Your Dollars with Discounted Gift Cards. If you plan to do some shopping with your tax refund, why not make your dollars stretch as far as possible? You can do just that when you spend your cash on discounted gift cards.

Depending on the merchant, you may be able to save as much as 35% off the list price of the card, making your tax refund dollars stretch even further. You can use those gift cards in lieu of cash in the coming months and even years, fattening your wallet every time you shop.

Stock Up On Household Essentials. Stocking up on household necessities is another smart way to use your tax refund, making the dollars go as far as possible. If your pantry is looking a little bare, why not check the sales and stock up on canned goods? Use your 2020 income tax refunds, and pro-actively search for sales/coupons, and restock now, while you have some cash. The money you save can be used for other things, so you can keep more cash in your pocket down the line.

Start a Business with 2020 Tax Refund. One of the keys to breaking a cycle of poverty or increasing your lifestyle is to “invest in yourself” and make your money work for you. This includes paying for education or skills (see below) or maybe starting a business or a side hustle job.

If you are expecting hundreds or thousands of dollars back from the government as a tax refund, use this money as a down-payment to do that. Maybe invest in a computer to start a blog or ecommerce site. Or put some money into your car for a rideshare or delivery type job. Or find other side hustles to start using a 2020 income tax refund.

Save for College or Pay for Job Training. If you have children, putting your tax refund to work in a college savings fund is a great use for the money. It is never too early to start saving, and you can add to the fund every year as those tax refunds keep rolling in. Education can help break a cycle of poverty.

No kids, want to invest in yourself, or kid(s) not make for college. That is totally fine as well, as there are tons of technical and skills based jobs that pay great wages and do not require you (or your kids) to go into debt. Pay for IT certificates or training. Or go to technical school for healthcare or high tech manufacturing, or even home repairs/maintenance. Pay for those type of skills with your 2020 income tax refund.

Boost Your Retirement Savings or Start One. Even if saving for college is not a necessity, saving for retirement surely is. Since about 70% of lower income families have no retirement savings, starting one (or adding a little money to an existing one) is a great use of a 2020 income tax refund. Whether you love your job or hate it, one day you will be moving on into retirement, and that 30 to 40 year vacation will likely cost a lot of money.

If you already have a retirement plan in place, using your tax refund to add to it could have a number of benefits, including lowering your tax bill for next year and making future refunds even larger. And if you are not yet saving for retirement, using the cash to fund an IRA is a great way to start.

Low income families can take advantage of 2020 income tax refund

2020 was a difficult financial year for tens of millions of Americans, and it hit lower income workers the hardest as they often work service type jobs such as in the travel industry, hospitality and the like. Tax filing season is tough, but there is a potential upside to all the paperwork and planning. If you are due a refund, you can make your dollars go further by using the ideas listed above.


Jon McNamara is the CEO of needhelppayingbills.com, a company that he started in 2008 and that specializes in helping low income families as well as those who are in a financial hardship. He also found NHPB LLC, a company committed to helping the less fortunate. Jon and his team also provide free financial advice to help people learn about as well as manage their money. Every piece of content on this website has been reviewed by him before publishing and many of the articles he has personally written. Jon is the leading author for needhelppayingbils.