Yay! It is tax refund time! (Article)

April 4, 2022
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Yay! It is tax refund time!

If you’ve received or are expecting a tax refund this year, now is the time to game plan how to use these dollars before they get swallowed up by monthly expenses. Instead, give the money a purpose. Consider putting your tax refund to work in the following ways:

  1. Start or Increase Your Emergency Fund
    Without an emergency fund, just one unexpected major expense can trigger escalating credit card debt. Many set a goal of three to six months of living expenses, but few reach that goal easily. Storing up that much money can take years. Give your emergency fund a boost with some of your tax refund. Consider an online savings account that features no fees and higher interest rates than typical banks.
  2. Pay Off High-Interest Debt
    After establishing an emergency fund, the next best thing you can do with your tax refund is to pay down credit card debt. Try getting the smaller balance cards paid off first, then tackle the remaining. Make sure you leave the cards at home to reduce spending temptation.
  3. Buy Something You Need
    Perhaps the car could use new tires or the house needs a little love. Using some of the tax refund to help with essential expenses can buy you peace of mind.
  4. Start Accounts for the Wants
    Using your tax refund as seed money for future purchases can kick start saving for those goals. Perhaps a family vacation or a new fishing boat are on your wish list. Setting up separate savings accounts for these goals, and even naming them, can keep you focused. Your tax refund could serve as a great starting deposit for these accounts. Then, set up automatic deposits to keep them growing.

…Or Maybe Not

Yikes, you just learned that instead of a nice refund, you owe in this year. If you have the money, get the bill behind you by paying by this year’s deadline, Monday April 18th. Then, consider reducing the number of exemptions you claim so that more taxes are withheld per pay period this year. This should lessen the risk of the same nasty surprise next year.

If you are unable to pay the tax bill in full, pay as much as you can. Then, file Form 9465, Installment Agreement Request, to set up installment payments with the IRS.

If you don’t need your tax refund for essentials, it’s easy to imagine all the ways you can treat yourself with the cash. Be smart with at least some that refund. One day you’ll be glad you did.

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