The average American taxpayer received a federal tax refund of more than $3,000 last year.1 That amount of money could help you reach financial goals much faster than you originally planned.
Before you launch into a mental spending spree, make sure you’ve handled a few key tax-time tasks.
Get the maximum possible refund
In most cases, the money you get in the form of a tax refund represents a free loan you gave the government. When you file the correct paperwork showing that you overpaid, you get a refund. You only get the refund amount indicated in your paperwork, though.
If you don’t file correctly and you claim too small of a refund, you’ll simply never get the full amount. For this reason, it’s crucial to maximize your tax return and minimize your tax burden by claiming the deductions and credits appropriate for your situation.
For most people, the best way to go about getting the largest possible refund is to consult a tax expert. Yes, you can DIY your taxes with online software. It may even be less expensive to do so. But you won’t know for sure that you paid the right amount of taxes unless you consult someone who handles income taxes for a living.
A tax expert can help you understand how making certain moves with your money, like contributing more to your retirement savings or making a donation to charity, could minimize your tax burden.
If possible, avoid the drive-thru tax preparation places. Pop-ups in big-box stores and malls are likely staffed with people who received only the minimum required amount of training in tax preparation. They are seasonal employees. Unless you have a very simple tax return, it’s in your best interests to consult someone who prepares taxes for a living year ‘round.
Remember these often-overlooked tax deductions
Even though the recent round of tax reforms made taking the standard deduction a better option for many people who formerly itemized, there are still some important tax deductions worth your attention.
Charity
If you drove your personal vehicle for a charity in 2018, you can claim a $.14 per mile deduction. You can also claim toll fees, parking costs, supplies you purchased for a charity or non-profit and donations to a charity or non-profit. If you have over $250 worth of expenses and donations, you’ll need receipts.
You may find yourself on the brink of paying a much higher tax bill if your taxable income comes close to reaching the next highest tax bracket. A donation to your favorite charitable organization may help you stay in a lower tax bracket, though.
Dependent credit
The dependent credit gives many families a big break on their tax bill. You can’t claim the child tax credit, worth $2,000 per child if your kid is over 16. The new tax laws give you a $500 credit for dependents over the age of 16, though.
If you support a family, you understand how expensive it can be to handle unexpected expenses. Consider setting up an emergency fund with part of your tax refund. Set aside $1,000 and protect your budget and your credit card balances from the harm caused by life’s surprises.
Self-employed Medicare Premiums
If you run your own business and you aren’t eligible for healthcare coverage through an employer or a spouse’s employer, your Medicare Part D and Part B costs and your payments for supplemental Medicare policies or the Medicare Advantage Plan are deductible, even if you don’t itemize.
College tuition credit
You can get up to $2,500 back when you pay a $4,000 tuition bill by taking advantage of the American Opportunity Credit. You can claim the credit once for each college student you claim as a dependent.
If you are in college or you have a dependent attending class, check with the registrar’s office to find out if there’s a discount associated with paying tuition for the fall semester in advance. If so, this is a great way to use your tax refund dollars.
Get your refund quickly
No one wants to wait weeks or even months to get their tax refund. To get yours fast, be sure to e-file. The IRS says they pay tax returns on most e-filed tax documents within ten business days. Keep track of your progress through their system by checking in once every 24 hours with Where’s My Refund?; an IRS-owned system that helps you understand exactly when your refund may land in your bank account.
Skip the advance on your tax refund
You may be tempted to get a portion of your refund on-the-spot with a refund advance service, but unless you are in the midst of a financial crisis and facing much larger fees, try to be patient and wait to get your refund directly from the IRS.
Refund advance services are expensive. It’s probably not be worth it to shave a few days off your payment arrival date.
Make your plan for how to spend your tax refund before the money arrives
Americans between the ages of 25 and 34 are likely to spend their tax refunds to pay down debt, according to a GOBankingRates survey2. 27% of Americans who get a tax refund will use it to reduce their debt load.
9% of those who receive a tax refund will make a major purchase. Investing, adding funds to a non-retirement savings account, and going on vacation are other popular options.
Invest in your living quarters
If you own your home and have been putting off repairs, dedicating your tax return to addressing that lingering plumbing problem or leaky garage roof is a wise move. Small problems tend to grow into more expensive issues, so you’ll save money in the long run.
If you plan to sell your home soon, consider upgrading the curb appeal. It’s one of the best things you can do to increase your selling price, according to real estate experts.
Refinancing your home’s mortgage to get a lower interest rate is another great way to maximize the positive effect your tax return could have on your financial situation. 10-year mortgages are popular with homeowners who can afford a slightly larger payment. If you qualify, you’ll save tens of thousands of dollars over the life of the loan.
Set aside money for a downpayment on a home
If you are ready to transition to homeownership, use your tax refund to start saving for a downpayment. Talk with a mortgage broker or a loan officer at your bank to learn about the requirements for pre-approval and start officially working toward your goal.
Pay cash for something you were planning to finance
If you know you’ll have to foot the bill for a sizable but unavoidable expense, use your tax refund to pay cash. For example, you could avoid a 10% interest charge on your child’s orthodontist bill and possibly get a discount for paying up-front.
Major car repairs, computers, dental work, appliances, and new furniture are easy to finance. If you can pay cash, you’ll pay a lot less.
Make car repairs now to save money later
Certain maintenance tasks and car repairs can help you save money in the long run. For example, worn tires cause your vehicle to use more gas. Replacing a failing battery could save you a tow bill and the hassle of being stranded with a car that won’t start.
Eliminate high-interest debt
Use your tax refund to save you money in the future by paying off high-interest debt, now. If you have a $5,000 balance on a credit card with a 21% interest rate and you pay $100 per month, it will take you 10 years to pay off the card. Over the course of that time, you’ll pay $6,986.26 interest. Eliminating high-interest debt is a money-saving move that could make a big difference.
Make your home more energy-efficient
Reducing your energy costs by making small home improvements is a good way to invest your tax refund. Additional insulation, a new roof, solar panels, new windows, and energy-efficient appliances help reduce the amount of money it costs to run your home.
Many utility companies offer a free evaluation to help you understand how best to increase your home’s efficiency. You may also be eligible for rebates on new energy efficient appliances, LED light bulbs, an energy-efficient furnace or air conditioner, or a programmable thermostat.
Handle some important financial to-dos
If you don’t have a term life insurance policy separate from your employer, use a bit of your tax refund money to initiate one. The process is simple. You can buy a policy online from an ethical and reputable company. In most cases, it takes just a few minutes. Choose a longer term of 20+ years if you can afford it. Life insurance prices are at an all-time low, so now is a great time to get this part of your financial life handled.
Take care of a nagging health issue
If you know you need to have some tests done, undergo surgery, or have a procedure that may cost you money, now is the time to schedule it. In most cases, you can talk with the business office and find out how much it will cost and whether you have options for payment. If the medical procedure or test is elective and you’ll have to pay for the entire expense out-of-pocket. Getting it out of the way will be great for your peace-of-mind.
Catch up on your bills
If you’ve fallen behind on some payments, you may want to use your tax refund to catch up. Late payment fees add up quickly. They can be a huge drain on your budget. Even if you have enough regular income to cover your ongoing expenses, it can be difficult to feel financially stable if have some bills that you haven’t paid. Get caught up and then reconfigure your accounts so they come out of your bank account automatically.
Upgrade your home electronics
Having a reliable home computer is important to running an efficient household. If your laptop or desktop is due for a replacement, consider dedicating a portion of your refund to the task.
Televisions are inexpensive entertainment. If you would like to cut the cable and eliminate that bill from your monthly budget, you may want to purchase a smart TV with access to Netflix, Hulu, and many other channels accessible via Wi-Fi.
Replace your vehicle
If you would like to eliminate a car payment from your budget, now is a good time to begin that project. Dedicate your tax refund to a “car fund” by depositing it into a high-yield savings account. Contribute a set amount of money from each paycheck to the account. When you’ve saved enough money you can pay cash for your next car. You’ll save thousands of dollars by eliminating the interest of a car loan and you’ll have more disposable income every month without that large payment coming out of your account.
While many people consider their tax refund a windfall, it’s actually earned income. If you think about your tax refund as money that belongs to you, the same as the money from your paychecks, you are more likely to spend it wisely.
It’s more efficient to think of a tax refund as a raise. You may want to use a portion of the money for something fun but let the majority of those funds work hard for you.
No matter what you decide to do with your tax refund, it’s important to put the cash to work on eliminating high-interest debt or adding to your savings. Think about how you could use the cash to save money in the future. Your tax refund has the potential to improve your life.
Sources
- Average 2017 Tax Refund: $2,878 : FedSmith.com. (n.d.). Retrieved from https://www.fedsmith.com/2017/04/11/average-2017-tax-refund-2878/
- Olya, G. (2018, December 05). How Millennials Plan to Spend Their Tax Refunds in 2019. Retrieved from https://www.gobankingrates.com/taxes/refunds/how-millennials-spend-tax-refund/