Once you have filed your taxes during tax season, you’ll either be notified that you owe money to the IRS, or that you’ll be receiving a tax return. While the news of receiving a tax return can be thrilling, this actually means that you were paying the government too much money on each paycheck in the first place. Now, what are you supposed to do with that money?
Millions of Americans receive tax refunds every year, a form of reimbursing overpaid taxes. It is common for Americans to blow their refunds on dinners out, clothes, and presents. Others use their tax refunds to help them get ahead financially. Refunds are great opportunities to set yourself up for success in the future. In this blog, we will tell you the best ways you can spend your tax refund money.
The 6 Best Ways to Spend Your Tax Refund Wisely
While it may be tempting to spend your entire refund on “fun things”, it’s best to put your refund to good use. Putting your money towards an emergency fund is always a wise decision, so you can save for a rainy day. You never know when financial emergencies will occur.
Perhaps one day your dishwasher suddenly stops working which could cost you $300-$500 in repairs. The next thing you know you are driving on the highway and get into an accident and need new tires, that is another expense you need to deal with. Car repair is very costly, and often you never know when you will need new tires. The following month, you get really sick and need to be rushed to the hospital. Suddenly, you have a large medical bill to pay. This is the number one reason why you should always have an emergency fund and be ready at all times. Putting your tax return money towards an emergency fund can be a way to reduce anxiety when future problems arise.
So, plan ahead! Designate your tax return money for emergency purposes, and stress less.
Pay off Debt
If you are someone who is drowning in debt, maybe it is your credit card, school loans, or car loans. Whatever debt it may be, it’s always a good idea to pay that off before making other big purchases. This helps you stay on the offense of your finances, instead of the defense. Use your tax refund to break even. Pay off those credit cards, student loans, and car loans to get financial freedom.
Not only does paying off debt-free you up financially, but it also improves your credit score. Having a good credit score can ultimately help you make large purchases in the future. So, not only does paying off debt relieve stress now, but your future self will be thrilled that you improved your credit. In addition, debt doesn’t stay stagnant. Interest rates increase your amount of debt over time. Put your tax refund money toward paying off debts rather than drowning in interest rates. Taking longer to pay off your credit card debt means you will be paying more interest. More interest just means more debt, so ultimately the longer you take to pay off debts, the more debt you will incur.
So, if you’re still thinking of putting your tax refund towards a new plasma screen TV, the newest phone, a shopping spree, or a “treat your self” day, perhaps take a look at your credit card statements first before making an impulsive decision.
Optimize your Savings Accounts
Similar to the emergency fund, it’s a good idea to place money in some form of savings account. You may already have a savings account through your current bank, and if you’re one of the people who received a tax return, it might be a good idea to look into high-yielding savings accounts.
These are savings accounts that can provide more interest on the money you place in the bank than the typical savings account. If you have a return, you might as well make it grow. There are many high-yield saving accounts out there. Doing thorough research on which high-yield savings is the best fit for you will be a huge benefit. Having a separate high-yield savings account will also help you not to feel tempted to use the money because you won’t physically see this account on your normal checking and savings account.
Make Smart Investments
When it comes to growing your money, it’s smart to invest! Investing can sound scary if you have no idea where to begin. To be on the safe side, investing in long-term stocks like ETFs will help you gain compound interest over time and ensure you have some money growing for your future. However, if you want to take risks and make the money back faster, investing in stocks and trading will be the best way you can grow your money. But be cautious when you are investing in stocks. Make sure you learn more about stocks and have a better understanding. Using your tax refund as a way to start investing is a great option!
Not only do you get a healthy lump sum for your return, but if you invest, then over time it’ll continue to grow. If you have a tax refund at all, it means you were paying too much out of your paycheck, to begin with. This is money that you could have been investing all along! Since there are so many ways you can choose to invest, you can always consult with a financial expert who would have more knowledge on investing your money in stocks.
Do you have a retirement fund set up? It is wise to open up a retirement fund. The earlier you start putting money towards your retirement fund, the more financially stable you will be when you retire. The money that is put towards your retirement fund will grow over time, your future self will thank you.
Putting your refund towards your retirement account is the smartest move anyone can make. When you secure a comfortable retirement fund before you reach retirement age, you can reduce your risk of late-career hiccups and stock market crashes. It's best to maximize all employer matching benefits through a 401(k) or SIMPLE IRA. If your employer offers matching benefits, take advantage of it. Your tax refund is effectively free money, and on top of that, contributing to your retirement will grow your IRA. Once you are 59 ½ years of age, you can start to make penalty-free withdrawals from your IRA. You will thank yourself later for putting a portion of your tax refund into an IRA.
If you have any financial goals, whether traveling, going on a family vacation, purchasing a house, a car, or anything else, you will still need money to obtain those goals. You will achieve your target sooner rather than later if you apply the money you get back from your tax refund to each goal.
It doesn't matter what your savings goal is, a tax refund can help you reach your end goal faster than you think. Instead of spending your money on impulsive unnecessary items, saving it towards a bigger purchase will ultimately make you happier. When it comes to money, it’s better to have a plan in place rather than relying on impulse. So, even if your savings goal is to eventually buy something “fun”, it’s better to plan for that than to immediately make a purchase with your refund.
What is the average tax return amount?
The average tax return amount changes every year. This year, tax refunds were $3,473 on average. Compared to last year's refund, this year's was higher. Therefore, you might have received the largest tax refund this year.
That means you have extra money to save or spend to pay off your debt. In some cases, you may owe money to the IRS instead of receiving a refund because you may have had additional withholdings.
How do I determine if I get a tax return next year?
The way tax returns are determined is based on your withholding status. You might remember filling out a W4 form when you first began your job. This form tells the IRS how much you plan to withhold from each paycheck and put towards taxes. If you received a large sum in your tax return, that might mean you chose to withhold a larger amount from each paycheck.
The opposite is true as well. If you owe the IRS a large sum during tax season, you may want to consider revising your W4 to minimize your end-of-the-year costs. W4 forms can be confusing. If you’re wondering how to fill it out, you should consult with your company’s HR advisor. You can also review this important information with a tax advisor.
When will I receive my tax return?
Almost nine out of ten taxpayers receive their refunds within three weeks. Generally, within 21 days of filing your electronic return or within 42 days of filing your paper return is when you will receive your tax return. The time it takes for you to receive your tax refund depends on when you filed your taxes for the year; the faster you file your taxes the sooner you will get your refund.
How to check the tax return status
If you want to keep track of the status of your tax return you can download the IRS2Go app that allows you to track your tax refund status. You will just need to provide your social security number or ITIN, your filing status, and the exact refund amount. If you don’t want to download the app, you can check the status of your refund using the “Where's My Refund?” online portal on the IRS website. The IRS has made it easy for you to track your tax returns.
Should you spend or save your tax return?
You may be debating whether you should save your tax return or spend it. It would be a smart move to save your tax return and grow that money for the future. But if you choose to spend your tax return, spend it on important things like paying off any debt you have or investing in property.
This will set you up to be in a better position financially and you won't regret spending your money. Even if you spend your tax return on rent, bills, and groceries this puts you in a better financial position than if you were to spend it on something impulsive.
What not to do with your tax return
There are plenty of things you may want to blow your money on when you get your tax refund. You cannot be impulsive and buy something that you only want at that moment. Money comes and goes so spending your tax refund on materialistic things is basically like flushing your money down the toilet.
If you still have yet to file your taxes, let us match you with qualified partners in our network to handle your taxes today. It’s best to file as quickly as you can after the tax deadline, the longer you wait to file the more penalties you may incur if you owe the IRS any money. Plus, you don’t want to miss out on getting your tax return check from the IRS! We have the best tax professionals all over the country who are willing to work with you virtually or in person. The sooner you get your taxes done the sooner you can start growing your money by following these six steps.
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