So, you have filed your annual tax forms and this year you get a tax refund. Yahoo! You are one of nearly 80 percent of Americans that get a refund on their tax returns. But what does that mean?
What are Tax Refunds?
Tax refunds are not a “lucky strike” or a surprising bonus. They represent a payback of an excess amount that taxpayers have remitted to the government as documented on their tax returns, essentially an interest-free loan to the U. S. or State Government. Refunds can be welcome, but they are also avoidable by changing the withholding amount on a W-4 Form and more closely estimating taxes that are due, thus being able to use more funds during the year.
What Are Some Smart Ideas for Spending Your Tax Refund?
- Once you have the tax refund from your annual Federal and State tax returns, you have options. You can spend the money, share it, or put it to work for you by investing or saving it. Consider some smart spending ideas. You could:
- Create or expand a “rainy day” or emergency fund. You never know when a job may end, an old furnace “kick the bucket,” or a car needs major repairs. Put some money in a separate account so you won’t be tempted to use the money for everyday expenses.
- Pay off high-interest credit card debt so that you can pay off the balance every month. This will save a lot of money and significantly increase your credit score.
- Pay off any other debts like student loans or car loans, thus freeing up significant cash each month.
- Contribute funds to a tax-sheltered retirement account. Even though retirement may appear to be a long time in the future, it is important to start sooner than later.
- Use the funds from the tax returns to contribute to a tax-sheltered education account, including education savings accounts and 529 plans to provide for your children’s future.
- Invest funds in the stock market through a brokerage account to manage your funds wisely.
- If you don’t have adequate home or life insurance, this is a great time to get these important insurances to protect yourself, your home, and your future.
- You can invest funds in education or get certifications that can enhance your current and future employment opportunities. This type of investment can offer great mental, emotional, and financial returns.
- You could start a business or grow a current side enterprise.
- You can make needed or greatly desired home improvements that will protect your home, improve its function, or increase its value.
- And you could give away a portion of the funds from the tax returns. There are many good causes out there that need funds and your charitable contributions entitle you to charitable tax donation deductions on your next tax filing.
Tax Refund Spending Mistakes
Sometimes money in hand is money that screams out “spend me.” Here are some suggested mistakes in using the funds from tax returns: spending funds on non-essential material things, taking money to a casino to gamble it away, or letting the funds sit in a low-interest checking or savings account.
Good advice is to plan wisely, file correctly, file early, and get professional assistance with your tax returns.
Get Expert Tax, Accounting, and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting, financial assistance, and tax preparation that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.