Is Tax Day a good or bad day for you?
In the financial planning world, we would say that getting a big refund means it’s a bad day…
I bet you didn’t see that coming!
A big refund is merely the IRS paying back the money they have borrowed from you all year!
(At 0% interest)
Those dollars could have been working for you all year instead of sitting in the IRS bank account. Now if you can’t save and you need IRS to do it for you… that’s a completely different problem that needs to be addressed. (Check out my previous post on budgeting here)
But for tax day, the ideal scenario is for this day to come and go with nobody owing nobody nuttin..
But that’s rarely the case and for 2016 the IRS expects that more than 70% of taxpayers will receive a refund in 2017. (www.irs.gov, no endorsed by IFS)
So, because 70% of you are going to get a refund, I have put together some ideas to make that money twice as valuable!
Double your savings
Perhaps you’d like to use your tax refund to start an education fund for your children or grandchildren, contribute to a retirement savings account for yourself, or save for a rainy day.
Do it! Use the refund to jump start those accounts.
Take it even one step further and commit to saving an equal amount of the refund over the next 12 months.
Example: $1,000 refund, divide it by 12 = $83/month.
Continue to save the monthly amount and correct your tax situation so the following year your refund isn’t as high.
Over 2 years you have doubled your savings!
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Split your refund in two for Double the Fun!
If stashing your refund away in a savings account or using it to pay bills sounds unappealing, go ahead and splurge on something for yourself. But remember, you don’t necessarily have to spend it all.
Instead, you could put half of it toward something practical and spend the other half on something fun.
The IRS makes splitting your refund easy. When you file your income taxes and choose direct deposit for your refund, you can decide to have it deposited among two or even three accounts, in any proportion you want.
Qualified accounts include savings and checking accounts, as well as IRAs (except SIMPLE IRAs), Coverdell Education Savings Accounts, health savings accounts, Archer MSAs, and TreasuryDirect® online accounts.
To split your refund, you’ll need to fill out IRS Form 8888 when you file your federal return.
Double down on your debt
Using your refund to pay down credit card debt or a loan with a high interest rate could enable you to pay it off early and save on interest charges. The time and money you’ll save depend on your balance, the interest rate, and other factors such as your monthly payment.
Here’s a hypothetical example.
Let’s say you have a personal loan with an $8,000 balance, a 12% fixed interest rate, and a 24-month repayment term.
Your fixed monthly payment is $380.
If you were to put a $4,000 refund toward paying down your principal balance, you would be able to pay off your loan in 12 months and save $780 in interest charges over the remaining loan term. Check the terms of any loan you want to prepay, though, to make sure that no prepayment penalty applies.
Cut your time in half!
Be twice as nice to others
Giving to charity has its own rewards, but Uncle Sam may also reward you for gifts you make now when you file your taxes next year. If you itemize, you may be able to deduct contributions made to a qualified charity. You can also help your favorite charity or nonprofit reap double rewards by finding out whether your gift qualifies for a match.
With a matching gift program, individuals, corporations, foundations, and employers offer to match gifts the charitable organization receives, usually on a dollar-for-dollar basis.
Terms and conditions apply, so contact the charitable organization or your employer’s human resources department to find out more about available matching gift programs.
Wrap up
So there is my short list of things you can do with your tax refund to double its value. Be proactive with your finances and talk to HR or your accountant to see how you can break even next year at tax time! You can do all of these things throughout the year not just in April!
As always, you can consult with me to discuss your current situation.
Look for future posts on financial planning and check out my recent post on investing.
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Thanks for stopping by and I hope you achieve financial success!
