Over the past month or so, I am sure you have come across a lot of articles or blog posts on what you should do with your tax refund. If you are one of those lucky Americans who actually received a tax refund, unlike me, and have not seen any of the posts on what to do with your tax refund, here is a quick list:
- Apply it toward your debt.
- Create an emergency fund, or add to an existing fund.
- Save on insurance - I just noticed this recently that some insurance companies will give you a discount, sometimes significant, if you pay your car and/or home insurance off up front instead of paying in installments.
- Use toward home improvement projects – making the proper home improvements can increase the value of your home. If you make energy efficient improvements, you should save the receipts as this can be used to write off the expenses during next year’s tax return and help you toward another refund.
- Invest in your future –this is a perfect time to set up an investment account or open an IRA.
- Invest in yourself – if your company does not reimburse you or pay for furthering your education, you can take a class to better your professional career or even use the money to start a business.
- Take a small trip or have some fun. Everyone needs to recharge their personal batteries from time to time. With a little extra money in the bank, you can feel good about taking a small trip and not having to worry about paying it of later.
Now, if you are like me and owed Uncle Sam this year, it is not the greatest feeling, especially when you were not expecting it. Luckily for us, we received a state tax refund and were able to offset the federal tax owed by half leaving a more manageable amount to pay. I am not sure about you, but I do not like someone else holding my money without paying me some sort of interest. This is exactly what Uncle Sam is doing if you receive a large refund. So if you owed, hopefully you were prepared to make the lump sum payment without hurting your finances or qualified for the IRS payment plan. But also keep in mind that you did not give the government an interest free loan.
If you itemized from the previous year, you will want to take note that some of your deductions may lower throughout this year such as mortgage insurance which, all else remaining the same, will increase your taxable income. This could result in your tax refund lowering on its own, or the taxes you owe to increase next year.
My goal, which may be different for others, is to get very little back or owe a small amount by the end of the year. When you do this, you maximize your dollars throughout the year allowing YOU to use your own funds to pay down your debt, have fun or save. Below are some tips that may allow you to minimize your tax return or limit your tax owed:
- Change your tax exemptions – Increasing your exemptions will take less taxes out of your pay check each pay period giving you more money. Decreasing your exemptions will have a reverse impact.
- Contribute to your retirement – If you increase your 401k contributions, or contribute to a traditional IRA fund, these will lower your taxable income come year end which will lower your tax liability.
- Contribute to a flexible spending account – If you are not familiar with a FSA, it allows you to pay for your health care needs using pre-tax dollars. The new maximum is set at $2,500. By contributing, it will allow you to get more for your money while also lowering your taxable income.
- Donate instead of selling – If you are going to sell something worthwhile, then that is ok, but if you have smaller items, donating may lead to better tax savings than what you would have received in payment. Donating is another way to lower your taxable income.
I know there are many other ways to lower your taxable income but these are the easiest and apply to most filers, not just people who itemize their deductions.