It’s hard not to like a tax refund. And many taxpayers receive them — over 116 million federal income-tax refunds were issued to individual taxpayers in 2014, according to IRS data.
If you expect to receive a refund this year, here is some food for thought.
Plan for Your Taxes
The reason you are receiving a refund is that you paid too much tax, either through wage withholding or by making payments of estimated tax. Instead of giving the IRS what amounts to an interest-free loan, you could have invested your money or used it for other things during the year.
It might make sense to have your employer withhold less tax from your wages or to reduce your quarterly estimated tax payments. But don’t pay too little. Then, you would have a large tax bill to pay when you file your taxes — and you could be subject to an underpayment penalty.
Make Hay This Year
Now let’s look at this year’s refund. What are you planning to do with it? Something impulsive, like take a vacation or make a purchase you wouldn’t otherwise make? If your finances are in good shape, then go for it. If not, you might want to consider the following possibilities.
Debt reduction. If you routinely carry credit card balances, use your refund to make a dent in your debt. With the average interest rate on credit cards around 18%, any reduction will help improve your financial situation.
Retirement savings. Unless you already have a healthy nest egg, investing your tax refund in a tax-advantaged retirement account is a step toward a more secure future.
College savings. Both Coverdell education savings accounts (ESAs) and Section 529 college savings plans provide tax benefits — two good ways to use your refund to save taxes and help with future expenses.
Emergency fund. If the money you have socked away for emergencies is running low, your tax refund could replenish it. If you don’t have an emergency fund, consider using your tax refund to start one. Aim for having enough liquid savings to cover between three and six months’ worth of expenses.
Connect with our team today by requesting a free consultation online for all the latest and most current tax rules and regulations or give us a call at 212-880-2617