Americans have many options for spending their tax returns. While a night on the town sounds like a great reward, balance is the key. Don’t have too much fun or you may regret it. The following essay gives some pointers on what to do with that cash burning a hole in your pocket and is one of the many great features offered by Ultius.
Top Five Ways to Spend Your Income Tax Return
The most dreaded time of the year is finally over: Income Tax Day. Whether you waited until the midnight deadline or opted to file in February like all the good boys and girls, the fruits of your labor are close at hand. The Internal Revenue Service (IRS) is preparing those coveted income tax returns, and banks will start issuing the money soon. Now for the fun part, how will you spend that pocketful of dough? Income tax checks are expected to be released within 20 days of electronic submission and six weeks of mailing hard copies (TurboTaxLisa). Though some special situations may take a little longer, the IRS recommends contacting them in the case your refund is more than three weeks late (TurboTaxLisa). And those refund checks are expected to be a little larger this year.
The IRS processed 49.5 million returns in 2014 and 49.6 million in 2015 (IRS). This year they expect the number to decrease largely due to the security breach in the 2015 IRS securities hack. On the other hand, refunds for 2014 and 2015 averaged between $3,100 and $3,200. The IRS expects 2016 tax refunds to increase an average of $5 per check (Erb).
As of February 26, 2016, the Internal Revenue Service (IRS) had received 58,304,000 tax returns, a change of just -0.4% from 2015, when 58,528,000 tax returns were received. Over that same time, 56,290,000 tax returns were processed, down 1.0% from the same time that year, when 56,857,000 tax returns were processed. (Erb)
The question on everyone’s mind isn’t “what will I get?” They want to know how to spend the more than $3,000.
1. Pay off those debts
Whether it be from persisting student loans or nonprudence in credit card spending, Nerdwallet’s 2015 American Debt Study learned
“the average U.S. household with debt carries $15,762 in credit card debt and $130,922 in total debt” (Issa).
Using tax refunds to pay off these debts is one good way to spend your return. But don’t jump in there and start spending; look at all needs first. Take inventory of current needs, wants, and items in your life. These often must take precedence over debt repayment. Once a plan has been made for spending, Americas can determine whether they can budget any of their tax return towards debt repayments. Nerdwallet’s Lindsay Konsko advises people to consider whether the lost money can be recaptured with regular pay and investments.
The caution here is that you have evaluated the risk of losing that money to make the return worthwhile and that you regularly earn enough money to pay off that card if your tax refund investment goes to zero (Konsko).
If monthly earnings and investments can recoup the loss and carry the family, repaying the money at a 100 percent loss is appropriate.
2. Invest in earlier retirement
Investing money for retirement is one of the most overlooked necessities in American culture. Sadly, government taxes aren’t enough to pay bills upon retirement, unemployment issues loom as a constant threat and pensions are becoming a thing of the past. Americans can boost their retirement savings by investing part or all of their income tax return into a retirement savings plan. There are several benefits to this plan:
- This opportunity only comes around once a year. There is no other time of the year Americans receive “free” money not dedicated to living costs. Tax filing season presents an opportunity to save more than normal.
- There are deductions and credits available as well, presenting another advantage to retirement savings during tax time. The IRS provides offers specific tax deductions and credits on some eligible retirement savings accounts (Taylor).
- Some investors recommend placing money into 401ks or traditional IRA (Taylor). These savings plans offer optimal deductions and credits on your future and current tax returns (Taylor).
- Roth IRA allows investors to avoid paying taxes on money withdrawn during retirement (Taylor).
3. Prepare for those difficult days ahead
If disasters like Katrina taught us anything emergencies can and will happen, there’s no escaping this fact of life.
- The U.S. Federal Emergency Management Agency (FEMA) declared 84 disasters in 2014 and 79 disasters in 2015 (FEMA).
- By April 2016, there were already 31 FEMA reported disasters in the nation.
The only solution available to us is preparation. While thinking preparation is a wasteful and boring use of time, when disaster strikes, those emergency preparations are comfortable cushions to fall on. Investment advisors recommend having at least $1,000 saved emergencies (Williams). This only is a third of the average refund check. That leaves more than $2,000 for other endeavors. If you already have a nest egg, add to that cushion. Or buy emergency supplies for a national or local disaster. And if you already have an emergency fund, there is no harm in adding to it.
4. Renovate your home
Homeowners, particularly middle class members who comprise the majority of these statistics, know only too well the hardships of maintaining the appearance, value, and safety of their homes. Some go months, or years, without preventive maintenance or repairs to crucial areas. This causes the investment to lose interest. Serious problems can come back to haunt homeowners when they do make repairs. This is why considering investing tax money into home renovation is important. First, money spent on improvements and repairs are deductible on next year’s tax return (TurboTax). So, not only are you using your returns to improve your living arrangements; Uncle Sam may give some of that money back to you – again.
5. Donate to a worthy cause
Many people only consider themselves when determining what to do with their income tax refund. This doesn’t have to be the case. There are several charitable organizations that need sponsorships and large donations. Since both bad weather and tax season comes during March and April, nonprofits such as Habitat for Humanity and Salvation Army need help taking care of people during disasters. Spring is a good time to donate to spay and neuter efforts at the local Humane Society. There are literally thousands of charities looking for help. Why not share some or all of that big fat check.
Balancing your money is rewarding. Whether investing in your retirement, repairing the home, preparing for disaster or helping others, balancing the refund check is most important. Most income checks are large, and they can be used for help in different areas. One mistake is “putting our eggs in one basket.” Make a list of items to spend the refund check on, and divide into priorities. Rate the list from one to ten, based on importance. Strive to invest the check in at list three of the items listed. This now only spreads the wealth, but leaves taxpayers with a sense of security and comfort.
Erb, Kelly Phillips. “IRS Reports Fewer Tax Returns Received, Higher Average Refund as Tax Season Rolls.” Forbes: Taxes. 3 Mar. 2016. Web. 29 April 2016. http://www.forbes.com/sites/kellyphillipserb/2016/03/03/irs-reports-few-tax-returns-received-higher-average-refund-as-tax-season-rolls/#39b054a6c335.
Federal Emergency Management Agency (FEMA). “Disaster Declarations by Year.” N.d. Web. 29 April 2016. https://www.fema.gov/disasters/grid/year.
Internal Revenue Service (IRS). “Tax Refunds Reach Almost $125 Billion Mark; IRS.gov Available for Tax Help.” IRS.Gov. 26 Fb. 2016. Web. 29 April 2016. https://www.irs.gov/uac/Newsroom/Tax-Refunds-Reach-Almost-$125-Billion-Mark-IRS.gov-Available-for-Tax-Help.
Issa. Erin El. “2015 American Household Credit Card Debt Study.” Nerdwallet. N.d. Web. 29 April 2016. https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/.
Konsko, Lindsay. “Should I Use My Tax Refund to Pay Off My Credit Card Debt?” Nerdwallet. 14 April 2014. Web, 29 April 2016. https://www.nerdwallet.com/blog/credit-cards/tax-refund-pay-credit-card-debt/.
Taylor, Phil. “5 Reasons to Save Your Tax Refund for Retirement.” U.S. News. 25 Feb. 2011. Web. 29 April 2016. http://money.usnews.com/money/blogs/on-retirement/2011/02/25/5-reasons-to-save-your-tax-refund-for-retirement.
TurboTax. “Home Improvements and Your Taxes.” N.p. 2015. Web. 29 April 2016. https://turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Home-Improvements-and-Your-Taxes/INF12010.html.
TurboTaxLisa. “Where’s My Tax Refund? How to Check Your Refund Status.” TurboTax Blog. 3 Feb. 2016. Web. 29 April 2016. http://blog.turbotax.intuit.com/tax-refunds/wheres-my-tax-refund-how-to-check-your-refund-status-18855/.
Williams, Geoff. “10 Smart Ways to Spend Your Tax Refund.” U.S. News. 5 Mar, 2015. Web. 29 April 2016. http://money.usnews.com/money/personal-finance/slideshows/10-smart-ways-to-spend-your-tax-refund/2.