Tips for Spending Your Tax Refund Responsibly
It’s that time again. People are adding up their earnings for the year and eagerly awaiting the arrival of their W-2 forms or their IRS wage garnishment release, so they can get their taxes filed and start the financial year out fresh. While not everyone is happy about tax season, over 70% of Americans have a reason to be excited. That reason is the tax refund. These are funds that people have overpaid on their taxes throughout the year, and the higher the income, the higher the return can be.
Getting a few thousand dollars can seem like an unexpected boon, and some people take the money and spend it like they stole it. Unfortunately, a lot of taxpayers experience serious buyer’s remorse once they’ve drained their bank account. Read on to learn more about responsible ways to handle your yearly tax refund.
Don’t Spend it All in One Place— Unless Necessary
Running straight from the bank to the local electronics outlet for that 70 inch, high-def, 4K television may be tempting, but it isn’t always smart. There’s a big difference between using your money for a want, and using it for a need. Far too many taxpayers have trouble telling the difference, and it’s causing them to fall into a cycle of debt.
Recognizing what needs to be paid first is harder than it looks. With so many credit cards, lease options, loans, and recurring fees, the amount you owe could be buried underneath a pile of bills. Automated payments are a disorganized person’s worst nightmare. Forget one scheduled payment, and suddenly you’re inundated with $300 in overdraft fees that you can’t afford.
Finances are harder to navigate than many people realize, and a tax refund can either be a huge help, or a huge disappointment. It’s much easier to buy something you want than it is to sift through your bills and start paying down your debt. All too often, short-term gratification wins out.
Prioritize and Plan
Treating your tax refund like a happy surprise is a mistake. While you should never spend or depend on money that isn’t in hand (or the bank), you can still prioritize and plan ahead. It starts with coming up with a general estimate of your refund for the year. You can do this by finding an online tax calculator, or by plugging your taxable income into a tax table. The tax tables are graphs or charts that can tell you how much you owe based on how much you made.
Make sure to subtract any deductions, exemptions, medical expenses, and other applicable amounts from your gross earnings before estimating your taxable income for the year. Once you have a rough guess of how much you owe, you can subtract this from taxes you’ve paid to get an idea of your refund.
Without a W-2 and any other necessary documentation, this won’t be dead-on, but you should be in the ballpark. If you haven’t already, create a list of all outstanding expenses. You can prioritize these expenses by due dates, percentage rates, and urgency. Replacing a pair of glasses that you absolutely need probably takes priority over your credit card bill, and this would be an example of responsible spending.
Allocate your refund to emergency situations first, and then look at where you stand financially. Check out these ideas to get a better picture of what needs to be prioritized:
- Obvious Emergencies- These are expenses that absolutely can’t wait to be paid. If you’re only vehicle is broken down or you’re in need of something related to your physical health, you should prioritize these first.
- Past Due Bills- Overdue bills can hurt your credit and cause you long-term financial problems. Using your tax refund to get anything overdue caught up or paid off is always a safe bet.
- Use it to Replenish Your Emergency Savings Account- Many people neglect their savings account to the point of financial ruin. When an emergency occurs, you need to be able to handle it quickly. Not having a financial cushion means taking out high-interest loans and entering into a cycle of debt. Experts recommend saving about 3 months-worth of income. This is usually enough to cover surprise expenses, and buys you time in case of job loss.
- Eliminate High-Interest Credit Cards and Loans- Evaluate your debt by interest rate, and find out which credit cards and loans are costing you the most. Paying these off can save you quite a bit in interest and fees in the long-run.
- Pay for High-Cost Home Repairs- A leaky roof is nothing to sneeze at, and no one likes to go through winter with a faulty furnace. Unfortunately, these things can cost thousands of dollars to repair or replace. Using your tax refund to improve your house is a good investment.
- Pay Off Vehicles and Big-Ticket Items- No one like having to make a car payment every month. Using your tax check to pay off your car, or even your house, when the remaining balance is low enough can put you one step closer to financial freedom. Not having these bills allows you to free up more income to pay off other debt, and it won’t take long for you to see a real difference in your monthly budget.
- Invest in Your Future- It’s never too early to start thinking about retirement. A decent sized investment can revitalize your retirement account and put you on the right path for your golden years.
What to do When You Don’t Get a Refund
If you were expecting a refund and didn’t receive it, it might be too early, or you could have a problem. It’s not uncommon to owe the IRS for past taxes, or to have your refund offset for student loans, child support, or unpaid government debt. You can call the IRS offset hotline for more information on outstanding taxes or other debts. When you are dealing with an offset, it’s important to communicate with the agencies you owe to find a resolution as quickly as possible.
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