It’s that time of the year when tax preparers and CPAs are busy preparing tax returns and their families are left to fend for themselves. In past years, about three-quarters of tax filers got an average refund of $3,000. This year will be interesting because of the Tax Cuts and Jobs Act that was signed in December 2017. Tax Policy Center estimates four out of five will see a tax decrease this year. However, some will have higher tax bills. Others may have smaller refunds because less tax was withheld from their paychecks.
Most Americans love their tax refunds. Some hate surprises including having to write another check to the government. Others consider it part of their annual savings plan or spend it as an annual treat, even though it’s an interest-free loan to the government.
Here are some smart ways to use your tax refund. I’ve put them in the order of smart money decisions to life-changing and impactful.
The average American owes $38,000 in personal debt (excluding mortgages) and two out of 10 allocate 50% or more of their income to debt repayment per a 2018 study by Northwestern Mutual. Paying off an 18% credit card is better than having a bank balance earning 2%. List your debts and pay off the smallest balances first (it could be a quicker “victory” for you than attacking the highest interest rates).
Top off rainy day fund
Escape living paycheck to paycheck and have three to six months’ living expenses in cash reserves. This protects you in emergencies and gives you flexibility such as switching jobs. Discipline and a budget are key.
Save and invest
Fund your goals such as retirement, college or trade school, home purchase and others. Participate in your employer’s retirement plan at a minimum to get the “free money” match. Invest savings to match the time horizon – if money is needed in two years for a house, then it may be better to avoid stock funds (volatility) or investments with surrender charges.
Are you properly insured (life, disability, umbrella, long-term care, etc.) and is it time to update your will and estate plan? Meet with your general insurance agent and attorney as needed.
The refund might not cover a home remodel, but what other repairs or improvements can be done for your car and home? Paint? Smart technology including thermostat, lighting and security?
Prepay a family vacation, upgrade the flight for more leg room or take to the skies with a drone.
Get the kids started
If they’re working, then consider helping them fund an IRA or Roth (maximum limits are $5,500 and $6,000 for 2018 and 2019, respectively). Show them online applications to help them organize and track their finances, and blogs such as www.thefinancialdiet.com.
Invest in yourself
Consider programs and classes that help advance you personally or professionally. Maybe a quilting conference at Asilomar, SXSW 2020, advanced welding course or hiring a personal trainer.
What’s on your bucket list? Adventure travel, photo safari or snowmobile trip to see the Aurora Borealis? This is like shifting funds to the memory bank. Remember that time when…
What can you do to help make this a better place, or make a difference for others? Mother Teresa said, “If you can’t feed a hundred people, then just feed one.”
These are some thoughts not only for your 2018 tax refund but also for planning ahead.
Secure your future wisely.