Four Tips for What to Do With Your Tax Refund
Many of us dread filing our taxes, yet we look forward to receiving a tax refund. Those of us with families often use those funds to provide for them. However, besides paying bills, buying necessities, and using it as fun money, I’d like you to consider using some or all of your refund to improve your long-term financial health.
1. Make extra debt payments
Having debt reduces your options. Paying off your debt allows you to enjoy your tax refund every month of the year! You’ll have more room in your budget for your other financial priorities. And using that money for debt may be a jump start on the path of becoming debt-free.
2. Boost your savings
Maybe you could use some more money in your emergency fund. Maybe you need to save for your next car.
If you struggle with spending money that is sitting in your bank account, there is another option. When you file your Federal tax return, you can choose to apply your refund or a portion of your refund to US Savings Bonds, I bonds. The I bonds have some inflation protection and the portion of the refund designated for the savings bonds won’t pass through your bank account. Note that you can’t cash in I bonds for the first year and there is an interest penalty if cashed in before 5 years. Your tax software or tax professional may offer this option. If they don’t, look for or ask for Form 8888 to direct some of your refund to I bonds. You can also use Form 8888 to direct your refund to multiple accounts. For example, you can direct some of your refund directly to your savings account and send the money you plan to spend to your checking account.
3. Boost your retirement investing
Your future self will thank you if you contribute to your retirement fund! I still haven’t met anyone who said they saved too much for retirement, but if this is you, please let me know.
4. Bonus – Plan for your taxes next year
You may be able to lower your tax refund by reducing your tax withholding during the year. This could result in more take-home money each paycheck. This may help you manage your monthly bills or savings. You do this by adjusting your W-4 with your employer. The IRS has kindly provided a withholding estimator to help you determine the best way to fill out your W-4. Should you decide to make adjustments, remember that if you have changes in employment and/or income you should revisit the withholding estimator to avoid any surprises.
The most important thing about the tax refund is to use it in a way that is best for you. But when your budget supports, please consider these options that may help you be in a better financial position.