After filing your federal income taxes, the wait for your tax refund is on. But you might want to take a step back before you spend that “extra” money. It helps to have a plan for how you’ll spend. That way, you can avoid blowing the whole refund on things you don’t really need. There are ways to spend that cash to better your financial situation, especially in the long run.
1. Dump Your Debt
First up, take care of your debt. If you’ve been carrying around high-interest credit card debt for years, using your tax refund to pay it off should be a no-brainer. Sure, parting with a big chunk of money all at once might be painful. However, it’s certainly worth what you’ll save on interest. Your refund might not even cover the entire debt in one fell swoop. But making a serious dent in what you owe is better than nothing. Plus, it can help you fall further and further into debt which could result in a charge-off on your credit report.
2. Fatten up Your Emergency Fund
Just about every financial expert agrees on the need for an emergency fund. This means having a set amount of cash that you only tap into for an unexpected expense. So if your car breaks down or your pipes burst, you can use your emergency fund to pay for it instead of charging it to your credit card.
Everyone’s emergency fund amount will be different. Your fund will depend on your income, expenses and comfort level. If you have a large family and your job situation isn’t stable, a six to eight month emergency fund may be appropriate. If you’re single, don’t have a lot of debt and you’re not worried about job security, three months of income may be enough. If you have no savings, placing your tax refund in a high-yield savings account is a great way to start building your emergency cushion.
3. Refinance Your Mortgage
Sometimes, homeowners wait around to refinance when there isn’t enough cash to cover the closing costs. But with a tax refund, you’ve got a perfect opportunity to finally get around to that refinance.
Even when if a refinance still isn’t in the cards, you can make your money work for you by investing in some home improvements to boost your home value. This can include switching out your old appliances for new energy-efficient models or completing that half-finished basement renovation. Useful touch-ups like these can go a long way towards adding value to your home, which in turn helps out if you want to sell in the future.
4. Build Your Nest Egg
When it comes to saving for retirement it pays to squeeze out every penny you can to fluff up your nest egg. For starters, you can maxing out your 401(k) or another employer-sponsored plan. But you can step up your savings even more by contributing the maximum to a traditional or Roth IRA. If you expect a healthy tax refund, you may want to look into opening one of these accounts.
With a traditional IRA, you defer paying taxes on the money you contribute. Plus, some or all of your contributions may be tax deductible. On the other hand, a Roth IRA allows you to make qualified withdrawals tax-free in retirement, but you don’t get the tax deduction now. Roth IRAs also limit who can contribute based on income restrictions. It’s also important to keep track of IRS IRA contribution limits. For 2018, you can contribute up to $5,500 to either type of IRA or $6,500 if you’re age 50 or older.
5. Give Back
Giving money to charity is a great way to make an impact in the lives of others. You’ll also be helping yourself if those donations are deductible. The key is to itemize your deductions. That way, you can deduct charitable contributions up to 50% of your adjusted gross income. Donating some or all of your tax refund may not yield the same financial gain you’d get from investing, but you’ll definitely reap some big emotional and psychological rewards instead.
6. Invest in Yourself
Using your tax refund to continue your education or further your professional development could be one of the wisest investments you make. Whether it’s a few hundred or a few thousand dollars, it may be exactly what you need. You can take your career to the next level or transform a hobby into full-time business. Even spending the money on a cooking class or a weekend retreat can prove worthwhile if you want to explore your passions or simply recharge your batteries.
Tips for Getting a Bigger Tax Refund
- Now you know how to best spend your tax refund. Now how do you get a bigger tax refund? For one, you can simply change your filing status. If you’re married, and you or your spouse has a significant amount of medical or business expenses, filing separately can increase the amount you can deduct.
- Speaking of deductions, you can also increase your tax refund by itemizing your deductions instead of taking the standard deduction. Doing so allows you optimize the amount of each deduction, especially helpful when you have multiple deductions to file.
- Another way to boost your tax refund is by maxing out your IRA. While you might not think that saving for retirement could help out your tax situation, turns out it can. This is because you can file IRA contributions as tax deductions.
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