Maybe you have recently filed your tax return and are expecting a refund have recently received one. The average federal tax refund in recent years has been around $3,000, according to the Internal Revenue Service. Refunds, inheritances, and bonuses are among the many windfalls that can change your financial situation. The Pennsylvania Institute of CPAs (PICPA) has some smart tips for people who want to get the greatest benefit from a cash jackpot.
Don’t Act Too Soon
Getting a nice check in the mail is exciting, and your first impulse may be to treat yourself with a big splurge. Before you do, CPAs recommend depositing the check in the bank and giving yourself a cooling off period. You’ll be better able to make a good decision when you’ve had a chance to get some perspective. You may ultimately decide that splurging just a small portion is a better decision, and one you’ll be less likely to regret later. Consider limiting any splurges by buying a prepaid debit card that you can use for impulse spending.
Don’t Talk about It
If you get a windfall
, even a relatively small one, you may be approached by friends and family seeking loans or financial help for a variety of reasons. Again, it’s probably best to hit pause and keep your good news to yourself, at least until you’ve had time to create a plan for what you’re going to do with the money. Having a plan in place will make it easier to stick to your priorities. If you decide to lend money to friends or family, be sure to set up a clear, realistic repayment plan with deadlines to help avoid misunderstandings or hard feelings in the future.
Solve Your Biggest Financial Problems
Make your most pressing financial concerns your priority. If you’re carrying a lot of debt, behind on some of your payments, or haven’t gotten around to starting a savings account or contributing to your 401K plan at work, address those issues first. Getting rid of debt
can reduce your monthly cash outflow, lower your stress level, and leave you better able to create a balanced household budget. It would be wise to put at least some of your windfall into a savings account, retirement plan, or even a 529 plan for college savings plan. Doing so will help you more easily reach financial goals such as a new home, college for your kids, or a comfortable retirement.
Make Smart Purchases
Create a wish list and spend some time deciding which items are really most important to you. Try to give added weight to the ones that offer long-term benefits. Everyone loves a tropical vacation, but consider spending your money on things like making needed car repairs, sprucing up your kitchen, or upgrading your aging furnace. You will benefit daily from these types of improvement projects while also increasing the value of your assets.
Don't Forget about Taxes
The new tax law, which was enacted at the end of December, is lowering 2018 taxes for many people; however, it is difficult to generalize – taxes will go up for some. Also, the new W-4 form is not straightforward to complete and there is a good likelihood that it will cause some people to be over withheld, while others may be under withheld. It might be a good idea to set aside a portion of your windfall in case you end up owing on your 2018 tax return.
Consult Your Local CPA
Your CPA can help you understand any tax implications of your good fortune, as well as help you create a plan to make the most of a windfall. Whether you win the lottery or simply have questions about your day-to-day finances, your local CPA can help. He or she can provide the answers you need for all your financial decision making. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife
Originally published April 21, 2017