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7 smart things to do with your tax refund

How to spend the money mindfully

Receiving a large tax refund can feel like you won the lottery. For many of us, it’s the biggest paycheck we receive all year. That’s a lot of “extra” money at our disposal.

In fact, more than 70 percent of Americans expected to receive a tax refund in 2018,1 with the average refund being $3,046.2

Keep in mind, however, that the money you got back was yours all along. You just gave Uncle Sam a year-long loan and he didn’t have to pay any interest on it. Not a bad deal for him.

While you shouldn’t necessarily aim to get a large tax refund every year, here are some ideas on how to use your windfall from Uncle Sam. (Hint: Skip the shopping spree at the mall.)

1. Pay off credit card debt

Life is expensive. And a lot of what we buy for ourselves and our loved ones goes on a credit card. Unfortunately, the average retail annual percentage rate (APR) for credit cards was 17.2 percent in 2016.3 That means that last month’s $150 trip to the grocery store will increase to about $175 – and more – if it’s not paid off right away.

That’s why if you have credit card debt, your tax return should go toward paying that off first – even before putting it into a savings account where you might earn just one percent interest.

Do you have more than one credit card, or other bills with high-interest rates? Then consider paying off the bill with the highest interest rate first and the required minimum on the others.

Chances are your credit card bill is bigger than your tax refund – and you still have other bills with interest rates attached to them. If that’s the case, you might want to use the “snowball method” – which encourages paying off a bill with the lowest balance first – if you want to feel a greater sense of progress.

2. Start an emergency fund

Life happens. And so do unexpected emergencies. Like a leaking sink. Or a family car that needs new brakes. And what happens if you lose your job unexpectedly? Access to cash (instead of a credit card) will help in all three scenarios. 

According to the Federal Reserve Bank of New York, $2,000 is the bare minimum you should have on hand in case of an emergency. However, only two-thirds of Americans say they have that amount of cash at their disposal.4

Start saving for a rainy day today. What if that rainy day stretches into weeks? Many experts recommend saving enough money that will cover three to six months of expenses in a money market or savings account.

Don’t feel overwhelmed by this amount. Even if your emergency savings are close to zero, any amount you start with will help. Also, your tax refund could amount to a week’s – or even a month’s – worth of expenses. That’s a great foundation to build upon.

3. Add it to your retirement savings, or jumpstart your retirement plan

Retirement might seem like a long way off. But don’t let that fool you into thinking it is. Are you on track with saving enough money for when that time comes?

A traditional or Roth IRA can help supplement your retirement savings. If you’re under the age of 50, you can contribute up to $5,500. That amount increases to $6,500 if you’re older than 50.5

Both contributions are about half of what the average tax refund is this year.

4. Save for a college education

Malcolm X said: “Education is the passport to the future, for tomorrow belongs to those who prepare for it today.”

Whether you go to a state or a public college, the price of a higher education is expensive. In 2016, the median borrower owed $17,000 for his or her student loans.6  That means their passport to the world may be put on hold until the debt is paid.

So preparing financially to provide an education – for yourself or a loved one – has become even more important. Setting up a college funding account with your tax refund may ease the future financial burdens of an education. Bonus: Once it’s ready to be used, you don’t have to pay any taxes on it.

5. Add it to your HSA

There are some medical expenses that you might expect – like your child needing braces. But there are others that come out of left field – like your child being hit in the mouth with a baseball and needing emergency dental work.

And if you have private health insurance with a high-deductible plan, that trip to the ER (or any medical treatment) can come at a high price. In fact, in a survey on the burden of medical debt, it’s reported that 64 percent of those in high-deductible plans have medical bills that amount to $2,500 or more.7

And a high medical bill might mean that you have to put off something else that you were looking forward to – like a much-needed family vacation or a home remodel.

6. Invest in your home

Your tax refund isn’t going to get you a new kitchen or bathroom. But it can open the door to smaller remodeling projects that are on your home improvement to-do list.

And some improvements will save you money down the road – allowing your tax refund to make an even greater impact. For example, you might want to replace your old appliances with energy efficient models. Or, perhaps you’re ready to replace that drafty entry door. The average cost estimate for a new steel entry door is $2,000, but you may save money on your energy bills and possibly recoup 75 percent of the cost of it if you decide to sell your home.8

Also, replacing a tired-looking backsplash, getting new faucets or adding a coat of paint to well-worn walls can do wonders for a home. Or sprucing up your yard with some pretty perennials will leave you feeling good.

7. Invest in your family

The main reason we work is to care for the needs of our family. So, it’s no wonder that we think of their needs when we receive a large tax refund.

When we have their physical needs covered, sometimes the best thing we can provide them with is time spent together doing something fun. In fact, experiential purchases contribute more to our overall happiness than do material purchases.9

Experiences can be small or big. For example, a visit to the zoo or museum or attending a concert or play may fit the bill. You could also take a cooking or art class together through community ed. Thinking bigger? Use that tax money to start a vacation fund for your dream getaway to Spain or to go on that road trip to Yellowstone. Whatever the experience, you can revisit it again and again by talking about it with friends and family.

Or maybe you’ll end up using it for a down payment on a car that will take you where you want to go.

Now that you have some ideas on what to do with the money that Uncle Sam borrowed from you, consider giving yourself a little “raise” by increasing your take-home pay. You can do this by decreasing your tax withholding. This means you’ll have the money you’d get back in taxes next year at your disposal all year long – all while earning more interest.

This information is a general discussion of the relevant federal tax laws provided to promote ideas that may benefit a taxpayer. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. Taxpayers should seek the advice of their own advisors regarding any tax and legal issues specific to their situation. 

1. “IRS Announces 2018 Tax Filing Season Opens with April 17 Deadline; 155 Million Tax Returns Projected, 70 Percent Expect Refunds,” IRS.gov, Jan. 29, 2018. 

2. Sahadi, Jeanne. “When will I get my tax refund?” CNN Money, March 13, 2018. 

3. “The Consumer Credit Card Market Report,” Consumer Financial Protection Bureau, Dec. 2017. 

4. Connick, Wendy. “How Much Money Do You Really Need in Your Savings Account” CNN Money, June 7, 2017. 

5. “2018 Limitations Adjusted As Provided in Section 415(d), etc.” IRS.gov, Jan. 2018 

6. Cilluffo, Anthony. “5 Facts About Student Loans,” Pew Research, Aug. 24, 2017. Note: The amount owed varied widely – a quarter reported owing $7,000 or less and a quarter reported owing $43,000 or more.

7. Hamel, Liz; Norton, Mira; Pollitz, Karen; Levitt, Larry; Claxton, Gary; Brodie, Mollyann. “The Burden of Medical Debt: Results from the Kaiser Family Foundation/New York Times Medical Bills Survey,” Kaiser Family Foundation, Jan. 5, 2016.

 8. “2017 Remodeling Impact Report,” National Association of Realtors (NARI) Research Department, 

9. Gordon, Amie M. “Can Money Buy You Happiness?” Psychology Today, Dec. 14, 2017.

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