Part of tax refunds going for practical purchases

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Updated: August 4, 2011 4:20PM

With a slight improvement in the economy, people are a little more willing to let go of at least part of their tax refund for purchases put on hold because of the recession.

A new study from the National Retail Federation suggests many Americans are planning to spend a little and save a little of the money they get back from their federal and state tax returns.

Jeanette and Carmen Camelio of Rochester, N.Y., are planning use their tax return to help buy the home they are renting from Carmen’s father. Last week, the couple were shopping for a refrigerator.

“This year we are spending it on something practical. Last year I think we bought a giant TV,” Jeanette Camelio said. “But still it’s scary. Spending money is terrifying.”

According to the survey sponsored by the National Retail Federation, 13.2 percent of Americans are planning to spend their tax refund on a big-ticket item, an increase from 12.5 percent last year. But consumers are still twitchy about the health of the economy and their jobs. According to the survey, 42.1 percent of respondents are planning to put their tax refund away for emergencies, up from 40.3 percent in 2010.

“Despite the difficult unemployment situation across the country, Americans receiving a tax refund this year seem eager to plow this money back into the economy,” said Matthew Shay, president and chief executive of the retail association.

Using a chunk of cash back from the government to buy big-ticket items such as furniture, appliances, televisions and even cars in the spring is an American tradition. This time of year is usually a busy time for retailers because more people have a little extra cash in their pockets.

Anthony Agostinelli, the owner of Charlotte Furniture and Appliance in Rochester, N.Y., said people seem to be making more practical purchases this tax season.

“People are out spending money,” he said. “Furniture is where we’ve noticed it the most. Maybe people have put a purchase off and put it off, and now it’s to the point there’s no more putting off.”

People also are planning to pay down debt, take vacations and pay everyday expenses. According to the survey, 41.9 percent of respondents plan to use their returns to shrink their dept, 11.9 percent are planning vacations and 29.7 percent will pay normal daily costs of living.

Craig Houck, a financial adviser with Manning & Napier in Perinton, N.Y., said the smart money on what to do with a tax return is to first pay down high-interest revolving debt such as credit cards; second, establish an emergency savings for unexpected costs; and third, invest money in a long-term financial goal such as a college or retirement fund.

“Paying down that debt is a good place for that money because if you are paying an interest rate of 18 or 19 percent on those credit cards, by paying those off you are effectively earning an 18 or 19 percent rate of return by paying it down,” he said.

Houck said another smart step is to change withholding on your paycheck so the return is not so big: Remember, the government doesn’t pay interest on overpaid taxes.

“Instead of waiting until April to get that money back, why not get a little bit each paycheck throughout the year?” he said.