Are you one of the millions of people who are expecting to receive a tax refund this year? Many people view their refund check as a gift from the government, but the money was yours all along. You just gave the government an interest-free loan by having too much money withheld from your paycheck. Instead, think of your refund check as a second chance to do something smart with your money. Need ideas? The PICPA has you covered.
Originally published Jan. 18, 2016.
Compromise. If you can’t resist using your tax refund for something fun, consider a compromise. Spend a portion of it wisely, and splurge with the rest.
- Fund Your Retirement. Open or add to a traditional or Roth IRA. Both offer tax advantages and can help ensure a secure retirement. The contribution limit for 2015, 2016, and 2017 is $5,500. Taxpayers who are age 50 or older can contribute an extra $1,000.
If you consistently receive a large refund, and you’re not contributing the maximum to an employer-provided retirement plan, like a 401(k) plan, consider lowering your tax withholding and using the extra money to bump up your retirement contributions.
- Destroy Debt. One of the best ways to use a tax refund is to pay down debt, especially high-interest credit card debt. Not only will you reduce – or hopefully eliminate – monthly credit card payments, but you can save money on the interest you would have paid. If you have several credit cards, pay off the one with the highest interest rate first, then work your way down.
- Buy Some Peace of Mind. Most financial experts recommend that you set aside at least six months of income in an emergency fund. Without an emergency fund, you could end up dipping into investments or relying on credit cards to get through a bout of unemployment or a wave of unanticipated expenses. Keep the money in a savings or money market account that can be easily accessed in an emergency.
- Bring It Home. For homeowners, one of the best ways to spend a tax refund is to invest it in maintaining or improving your home. Improvements like an energy efficient heating system, updated bathroom, or some new landscaping can increase the value of your home and improve your quality of life.
- Get Smart. You could also use your refund to take your career to the next level. Sign up for a course and learn new skills. If you’re thinking of changing jobs, attend a conference or a seminar where you can network with others in your field.
- Think Tuition. If college education costs are in your future, start or add to a 529 college savings plan. Withdrawals for qualifying education expenses are tax-free.
- Do Some Good. Donate a portion of your refund to your favorite charity. You will help someone in need and may earn a tax deduction for next year’s return.
- Get a Jump Start on Payments. Consider putting some money aside to pay for annual bills, such as insurance premiums or professional associations that you tend to forget about until they come due.
- Take Stock. Start investing, as this is your chance to make good on plans to get into the stock market. Mutual funds, which are less risky, are a great way to get started.
- Come Up with a Plan. A comprehensive financial plan is a great way to make your refund pay off. Make an appointment with a CPA who can help you plan your financial future. To find one in your area check out the CPA Locator.
- Change Your Withholdings. If your plan indicates that it is appropriate, complete a new W-4 form and increase the number of personal allowances you claim. This adjustment will reduce the amount of tax money withheld during each pay period and increase your take-home pay. Just be sure that you have a plan in place for using that extra money in your paycheck, whether it is investing, saving for retirement, or avoiding debt.