When tax season comes around – one of the most common questions on a taxpayers’ mind is whether they’ll get a tax refund or owe the Internal Revenue Service (IRS) money. This year, the IRS expects around 150 million individual tax returns to be filed. Last year, about seven out of 10 returns filed received a refund with the average being about $2,900. The amount of refund, or balance owed, is dependent upon many factors. Many Americans love getting refunds even though the overpayments are interest-free loans to Uncle Sam. They may consider it part of their annual savings plan or spend it as a treat. Some have less predictable income – such as business owners and salespersons – and they’re glad they don’t owe the government more money.
Here are six smart ways to use your tax refund this year:
1. Invest in Your “Rainy Day Fund”
Discipline and a budget are key. It’s recommended that you have at least three to six months’ living expenses in cash reserves. Retirees might even feel better with a bigger cushion of up to one to two years. This protects you in emergencies and gives you flexibility such as switching jobs or relocating.
2. Payoff Debt
The average American owes $29,800 in personal debt (excluding mortgages). According to a 2019 study by Northwestern Mutual, 15 percent of Americans believe they’ll be in debt for the rest of their life. Credit card and mortgages are tied as the main sources of debt for one out of five. Nearly a third pay more than 15 percent interest on cards and 12 percent say they “always” pay only the minimum required payment (covering interest without paying any principal). Paying off an 18 percent credit card is better than leaving a money market balance earning 1.75 percent.
Tip: Free yourself from debt – List your debts and pay off the smallest balances first (it could be a quicker “victory” for you than attacking the highest interest rates).
3. Save and Invest
Fund your goals such as retirement, college or trade school, home purchase and others. About one in five Americans have less than $5,000 saved for retirement and 56 percent don’t know how much they’ll need to retire comfortably. 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.
4. Protect Yourself
Close the gaps on risks you cannot afford to assume. 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.
5. Treat Yourself
Stop and enjoy how far you have traveled. The refund might not cover a major makeover, but will it cover some repairs for your home or car? Or really treat yourself with a family vacation, enroll in a quilting conference at Asilomar, hire a personal trainer, or see the Aurora Borealis by snowmobile.
6. Good Karma
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.” You might not have any debt and giving away a couple hundred dollars might not impact your savings. So, if you’re feeling generous, donate to a charity of your choice or help out a friend in need.
These are some thoughts not only for your tax refund but also for planning ahead. And by the way, bring a latte or bouquet of flowers to your tax preparer or CPA. This is that time of year they’re busy sifting through your boxes of receipts and their families are left to fend for themselves. Albert Einstein once said, “The hardest thing in the world to understand is the income tax.” Secure your future wisely.
This article can also be viewed at the Reno Gazette Journal.