5 productive ways to spend your tax refund
Sunday, February 24, 2013
Despite the delayed start of the 2013 tax filing season, millions of taxpayers have been able to file their 2012 tax returns.
It's no secret that the folks who tend to file as soon as they can are those who are getting refunds.
If you're one of them and still don't have any plans for your tax cash, today's Daily Tax Tip offers five general ideas.
1. Save it
You can put your tax refund in an emergency fund. Such a stash is definitely welcome when your car needs work and your credit cards are maxed out.
Open an account for a specific goal. It could be a down payment on a home or enough money to purchase a car to replace the one that keeps depleting your emergency account.
Heck, you could even start saving for something really fun, like a European vacation. By setting aside money regularly for whatever goal, you'll be able to get what you want without going into debt.
Or you can go longer-term and put your refund into a retirement account. You have lots of options.
A traditional IRA might be appealing if deducting the contribution also could help you reduce your 2013 tax bill next year. A lot of younger people are partial to a Roth IRA. It won't produce an immediate tax savings, but there's no tax due when you take out the money in retirement.
And if you're self-employed, you have more options, such as a SEP-IRA, a Keogh or a solo 401(k).
2. Invest it
While savings are a key part of your financial plan, you also want to invest. If the big 1 percent vs. 99 percent debate taught us anything, it's that the rich are different from you and I because they let their money do most of the work.
Yes, building a portfolio can be scary. Stocks go up and down over and over and over. But if you're in it for the long haul, then equities have traditionally been a good move. Remember, when the market is down, you're getting a bargain price on your investments.
Plus, as Warren Buffett and Mitt Romney made clear, they tend to pay lower taxes on their unearned income, which is the tax term for investment earnings.
It's true that, thanks to the American Tax Relief Act passed on New Year's Day, capital gains taxes increase this year from 15 percent to 20 percent for higher income earner. But most of us will still pay the 15 percent rate. And that's substantially lower than the 25 percent or 28 percent tax rate that most of us face on our ordinary income.
For a good primer, check out the investing chapter in "The Future Millionaires' Guidebook." Full disclosure time. I wrote a couple of chapters (taxes, of course, and estate planning) for this e-book and stand to benefit if you buy it. But even if I weren't involved, I'd highly recommend it.3. Pay off debt
Most of us owe. If your debt is a bit out of control, your tax refund money might be able to help you rein it in.
Start with your credit cards. Plastic can be so handy, but it also can be so expensive. If pay just the minimum each payment cycle, you're essentially treading water. The interest that keeps accruing will keep you in debt for years. So pay off at least your highest interest card balance.
If you've got a car loan, consider using your refund to pay that down -- be sure to designate the extra payment goes toward principal -- or pay it off completely.
Want some help in dealing with your debt? Check out The Debt Movement for advice, from personal finance experts as well as a community to support you in your debt reduction effort.
4. Improve yourself
OK, you've already broken all your New Year's resolutions, but your tax refund can give you a second shot at them.
Want to lose a few pounds? Use your tax cash to join a gym.
Enroll in a course to learn another language. Knowing some key Italian phrases could come in handy when you reach your goal of saving enough money for the European jaunt mentioned in refund spending tip #1.
Looking to boost your career? Take a work-related class. If it helps you maintain or improve your job skills, it could even provide you a tax break as a miscellaneous expense deduction.
5. Help others
Got everything you want? Good for you.
Then consider using your refund to help folks who aren't so lucky or satisfied.
You can start with your family and friends. Gifts of cash or property are always welcome and it's so nice to hand out goodies when you're around to get the thanks. And giving gifts generally have no tax implication for either the giver or the recipient. The key here is to stay under the annual gift exclusion amount, which is $14,000 for the 2013 tax year.
Or you can give to your favorite charity. Your tax refund donation would fall into the cash gift category, but you have many options if you want to do more. You can give goods, appreciated stock, vehicles. And if you do donate your tax refund (and more!) to a qualified IRS charity, it could give you a tax deduction next filing season.
These are just a few ideas of how to spend your tax refund. You can mix and match these suggestions as you wish. Pay down some debt, save some and enroll in a fun continuing education course. Or invest most of it and then go out to dinner with the rest!
It's your tax refund and your call. Enjoy!You also might find these items of interest:
thanks, Karen, for your happy refund news. I agree that we all need to treat ourselves now and then. I'm all for being money smart, but if it's always just save, cut, frugal, people get tired and frustrated and then usually make even worse money decisions. Enjoy!
Posted by: Kay | Wednesday, February 27, 2013 at 01:43 PM
Most years we save or invest half and then work on the house. This year we are going on vacation and I don't have any guilt about it. I definitely think people who have debt should pay it off and follow the Debt Movement for sure!
Posted by: Karen @MSEnthusiast | Wednesday, February 27, 2013 at 01:38 PM
Thanks for this post! It can be very hard for people to decide what to do their with tax refund (other than just blowing it) especially the first few times you receive one. I'm receiving my first refund this year and not entirely sure what to use the money for. You're spot on by saying younger people may be interested in the Roth IRA. I like the idea of no tax due when I finally take the money out during retirement. It takes away the risk of the tax rate increasing by the time I'm ready to take the money out (although who knows, it could potentially go down too!). Investing a portion of the refund seems like a logical second option.
Posted by: Ashley Falgout | Monday, February 25, 2013 at 04:20 PM