For many, one of the most delightful experiences in adult life is receiving a tax refund check from the IRS. It’s a true early-spring brightener after a long and bleak winter. Sure, you might want to splurge that check, and nobody is more deserving of a treat than you.
However, before you get all impulsive, stop and think about how that refund might be able to help you get to the next level in life. In fact, smart use of your tax refund check may draw you closer to your lifetime financial goals.
If your tax refund check falls into the nationwide average, you may not have as much to work with as the typical refund check of the past. As of tax season 2019, refunds are smaller compared to the previous year.
The IRS has processed 26.9 million individual income tax returns as of February 8; the average refund so far has been just $1,949. That’s a decrease of 8.7% from the year before ($2,135).
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It’s important to remember that receiving a smaller tax refund is not necessarily a bad thing, since it could mean you received more of your money as you earned it rather than making an interest-free loan to the government.
Whether you received a higher or lower refund than last year, you may want to reign in your tax-refund-spending dreams and think in more practical terms. Here are just a few ideas you might consider.
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1. Unloading Your High-Interest Debt
All your earnings and hard work may sink your sense of accomplishment if you are weighed down with high-interest debt. As much as you might be tempted to use your refund to treat yourself to something special, think instead about eliminating, or at least shrinking, high-interest debt.
Those high interest rates can really do a number on your future financial plans. If you don’t have any high-interest debt — and, if so, we salute you — you could use your refund in some of the other places discussed below.
2. Starting a Rainy Day Fund
How are you fixed for life’s unexpected emergencies? If you were to lose your job, would you have about three-to-six months of living expenses at the ready? How about a car or home repair, or dental surgery? Taking that tax refund and stashing it away for emergencies may save you in a pinch. Your future self may thank you.
Don’t be a statistic: Bankrate recently found that only 40% of Americans would be able to pay an unexpected $1,000 expense from their savings account.
3. Starting a Health Savings Fund
Given the complicated state of our country’s healthcare system, you may want to consider starting a health savings account (HSA). In order to contribute to an HSA, you will need to have a high-deductible health plan.
If that applies, HSAs could be an opportunity to save for current and future healthcare expenses. These accounts allow you to contribute with pre-tax dollars, your money to grow without paying capital gains taxes and tax-free withdrawals assuming the withdrawals are used for qualifying medical expenses.
As of 2019, you can max out your HSA contributions at $3,500 for the year (for you alone) and $7,000 for families.
4. Saving for College
A 529 college savings plan allows you to contribute your after-tax dollars, and you’re not taxed on this money as you save it. If you have kids or plan on having them, using your tax refund toward this goal could be a great first step toward dealing with the rising cost of college education.
Additionally some states and 529 savings plans enable you to deduct your contributions from your state income taxes, so these contributions could save you tax dollars in the future.
5. Improving Yourself
You could use your tax refund to make yourself more marketable to future employers. Consider additional or new career training, attending conferences, joining professional organizations, earning an MBA or pursuing networking events.
This could all work toward creating a new you and possibly a bigger paycheck with bigger tax refunds in the future.
6. Powering up Your Retirement Savings
Does your company offer to match your retirement savings in your 401(k)? If so, you could take advantage of this easy money by increasing your contributions with your tax refund.
Doing this can maximize the benefit your employer offers.
Yep, you might wind up with a bit less in your paycheck as a result, but you’ll be lowering your taxable income while increasing the amount of your retirement savings.
Placing your tax refund into an Individual Retirement Account (IRA) could be a good way to reduce this year’s taxes—depending on your income and access to an employer-sponsored plan.
You can contribute to your IRA all the way up to the tax filing deadline day of April 15 (whereas many other investments have a deadline of December 31).
7. Becoming a Homeowner
You could also use your tax refund toward offering up a healthy down payment on a new home. Offering a larger down payment may reduce your mortgage and private mortgage insurance payments.
8. Making Much-Needed Repairs
Already own? You might consider using your refund to make repairs and/or upgrades that could make your home more functional and also more re-sellable.
You might be tempted to treat yourself instead, but before you do, think about life without that leaky toilet or unpredictable hot water heater. And think about how much more your property may be worth with those repairs and upgrades.
9. Starting an Investment Plan
If you’ve been putting off any serious investing until you have some available cash, now might be your chance. Of course, do your research first, but now could be the time to ramp up your savings to accomplish short or long-term financial goals.
10. Paying for the Small Stuff All at Once
Do you have subscriptions to streaming services? How about a gym membership or a phone app subscription? If possible, you could pay the annual fee for these expenses up front, rather than paying them month to month.
This may simplify your budget and free you up to focus on the bigger picture. All the while, you might keep saving for next year’s renewals so that you can pay them all at once year after year.
11. Paying it Forward
The IRS sets a limit on the gifts you are able to transfer to family members and others without having to pay a gift tax. As of 2019, that limit is $15,000 per recipient.
This means that you can send gifts to as many people as you want, as long as you don’t gift more than $15,000. FYI: there is a lifetime limit for gifting, which is $11.4 million.
Equating Your Tax Refund With Your Salary
When it comes down to it, your tax refund isn’t “free money.” It’s really your money given back to you by the government. Uncle Sam was merely holding on to it for a while. It’s yours, so be smart with it.
What Everybody Else Is Doing With Their Tax Refunds
Where do your fellow Americans stand when it comes to spending their tax refund checks? In 2019, 27% of your fellow Americans plan to use their refund money to pay off debt.
In fact, Americans age 25 to 34 are even more likely to say that debt is their number-one priority; 38% say that they plan to use their refunds to attack their debt. Other top priorities: making a major purchase (9%) and saving for retirement (9%).
Any regrets? Hardly. Americans seem to feel that they have done the right thing with their tax refunds. In fact, 87% have not a single regret about how they spent their check. Baby Boomers (age 55 to 64) are the least likely group to experience regret—95% had not a one.
Gen Xers, though, are more likely to have second thoughts — 19% of them admitted some regret on how they spent their tax refund.
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This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Image Credit: Sean Locke.