Many people look forward to receiving a refund instead of paying taxes. Have you received or are anticipating a tax refund this year? A tax refund may feel like a bonus from the government. However, receiving a tax refund simply means you overpaid on your taxes last year and gave the government an interest free loan. This is money that you earned but did not have access to throughout the year. While it may be tempting to treat your refund as a “bonus” and blow it all, it may be wiser to evaluate what you should do with your tax refund.
What Should You Do With Your Tax Refund?
Add to Your Retirement Savings
An IRA is a wonderful way to save for your retirement. Even if you participate in a company sponsored 401(k) plan, you can use an IRA to supplement your retirement savings. For 2018, you can contribute up to $5,500 into your traditional or Roth IRA ($6,500 if you’re 50 or over). Remember, each dollar that you invest into your retirement will benefit from compound interest. The more you invest now, the more you will have at the time of your retirement.
Pay Down Debt
This is especially true if you have any credit card debt. With high interest rates, credit card debt can be a very expensive way to borrow money. It is also a leading factor in determining your credit worthiness. If you don’t have any credit card debt, paying off a student loan, car loan or putting more money towards your mortgage may be a good idea, especially if you have a high interest rate on those loans.
Add to Your Rainy Day Fund
We suggest you have at least 3 to 6 months living expenses stowed away for emergencies. Whether it is a car repair, unforeseen medical expense, loss of a job or something else, you will be glad to have this financial safety net.
Make Home Improvements
Use your tax refund to tackle various home improvement projects including leaky faucets, a new back splash, a beautiful light fixture or a fresh coat of paint. If there has been a project on your mind, maybe now is the time to tackle it!
Donate to Charity
Use your tax refund to give back to a cause that is close to your heart. As a bonus, you may be able to take a tax deduction for your charitable contributions throughout the year.
It’s okay to set aside some money to treat yourself and your family. Review your finances and see how much of your tax refund you can put towards something extra. Whether it’s a night on the town or a vacation, you worked hard all year and deserve something a little extra!
How to Avoid Getting a Refund Next Year
While getting a tax refund may be better than owing money, the best possible scenario is to break even. Remember, that interest free loan that you gave the government could have been in your pocket throughout the year. Those dollars could have been invested and earning you compound interest. With the recent changes in tax law, you may want to review how much you’re withholding and ensure you aren’t underpaying on your taxes. The IRS has a withholding calculator that you can use to estimate how much you should be withholding. If you would like to change your withholding, you can submit a new Form W-4 to your employer at any time.
Consult a Financial Advisor or a CPA to review your finances and taxes. While a CPA can review your taxes and ensure you are withholding the correct amount, a Financial Advisor can help you decide how best to use your tax refund to provide the most benefit for youand your family.
Feel free to reach out to us, we have a team of Financial Advisors and CPAs available to help!
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