Ideas for Your Tax Refunds
How have you been using your tax refund? Spend, save, or invest? About three in four taxpayers received a refund, and if you're one of them, have you ever wondered the clever ways you could use them for? Catch some smart ideas here.
1. Invest in Some Really Smart Tax Advice
About three in four taxpayers received a refund for 2017 and are expected to receive one for 2018. It may not be as large as last year's because of the changes in the tax law: As of Feb. 15, the average refund was down 17%, from $3,256 last year to $2,703, according to the IRS. All the same, it's an influx of cash. But before you start spending your refund, here’s an important reminder.
“A lot of people believe their tax refund is free money they are getting from the IRS. Unfortunately, nothing could be further from the truth,” says Ali Hashemian. “In reality, this is a refund of the amount overpaid in taxes throughout the year.”
2. Celebrate 'Treat Yo’ Self' Early
Why shouldn’t the day you receive your refund be the best day of the year? You don’t have to wait until October 13. (In case you didn’t know it, that’s Treat Yo’ Self day, so designated by the popular NBC sitcom Parks and Recreation.)
If your finances are a mess, you should clean those up first, says Morris Armstrong, an enrolled agent and registered investment advisor. However, life's not just about the financial bottom line. With all the stress people face, it can be smart to use an unexpected refund for something to benefit the body or the soul.
3. Shop with Cash
Armstrong isn’t the only financial planner who thinks it’s OK to put your refund toward something that isn’t strictly necessary.
A new couch, a new TV, or a seat on a flight to your favorite locale might not seem like smart ways to spend your refund, says Ashley Dixon, a certified financial planner at Gen Y Planning. “But these items may be goals for you, and using the cash from your refund is better than putting these items on your credit card,” she adds.
4. Use It to Dial Down Your Stress
What if you really don’t want to spend your refund? Don't just focus on what's the most financially prudent choice to make. Think about whether there's anything that keeps you up at night.
“A common question we run into with clients is, ‘Should I pay down debt or should I invest my cash for the future?’” says Lauren Podnos, a certified financial planner at Wealth Care LLC. “The black-and-white answer is if you have a 4% interest mortgage and you are saving toward retirement in 20 years and are in a relatively aggressive portfolio earning, on average, 6% to 8% per year, then you still come out on top saving money over paying off debt.”
5. Invest Tax Free
Finally, Hashemian says, “the best thing a person can do with their tax refund is to invest that money in something that can grow tax-free. Some traditional tax-free options you should consider include Roth IRAs for retirement, health savings accounts for medical expenses, and 529 accounts for educational expenses.
The money you invest in a tax-advantaged account can grow much faster than the money you put in a taxable account. Since you won’t pay any capital gains tax in years when your returns are positive, you’ll be able to keep more of your money invested. Tax-free municipal bonds can reduce your tax bill further when you’re already taking full advantage of retirement, health, and education savings accounts.
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Sourced by: Investopedia