From where we sit, getting a tax refund is a sin. But we all sin a little, right? And most don’t know that paying the U.S. Government more than you should in taxes is on the wrong side of the moral compass. “Wait,” you say, “I thought giving was good.”
In this case, “overgiving” is not good. You’re essentially spotting Uncle Sam an interest-free loan. But that’s why we’re here to help!
If you’ve already overcommitted this past year, we’ve got at least 5 solid tips for what to do with that extra cheddar.
But, first the public service announcement …
1. More than $500 on your tax refund? Take a look at your W-4
Your W-4 is a form your HR department handed you when you were hired. You might recall it being this weird questionnaire that computes how much money should be withheld in your payroll taxes. I’ve known people who just phone a friend to get the number of allowances: “Johnny does 7, so that sounds good to me.”
There are many online calculators available that make more sense than the actual form:
- Kiplinger: https://www.kiplinger.com/tool/taxes/T055-S001-tax-withholding-calculator-kiplinger/
- TurboTax: https://turbotax.intuit.com/tax-tools/calculators/w4/
- If you don’t trust any of the above and want to essentially walk through the form: https://www.irs.gov/individuals/irs-withholding-calculator
Use them. Get your number and then call your HR department to compare what they have on file. If it’s different, change the allowances you’re claiming.
One of our founders, Kevin Conard, likes to use this opportunity to encourage people to increase the amount they’re saving into their 401k. If you’re increasing the allowances you may not notice a difference in your paycheck. Solid plan.
2. Build Your Safety Net
A lot of the other tax refund tip lists have pay off debt listed first. Not going to argue exactly (I’d be contradicting some of my previous tips). But I will pitch an alternative point of view by focusing on your emergency fund with this particular “windfall.”
In my experience, psychologically, building an emergency fund can be a hard tip to grasp. Bad things happen to other people, right? Thus, no emergency fund. Then where do they go – their credit cards. See the vicious circle?
Take your tax refund and either 1.) contribute to your existing emergency fund (Go you!), or 2.) open a savings account to establish that safety net. I typically recommend an online savings account because of the likely preferential interest rates and convenience.
3. Get Rid of the Bad Mojo, i.e. DEBT
Already have a relatively robust emergency fund? Awesome. Then go after the parasite of the financial world – bad debts.
Credit cards. Student loans. Auto loans. They all could be dragging down your ability to explore other financial opportunities. If your tax refund can help pay off any of these items, do it.
“What about my home?” you ask. I wouldn’t consider using the money to pay down your mortgage. But you might use the tax refund to help cover the costs of refinancing if you:
- Are able to lower the term, say from a 30-year to a 15-year mortgage, or
- Can get a significant interest rate reduction (by significant, I’m talking about at least 1% — if this is a home you plan on living in for at least the next few years. That threshold will typically pay back the initial cost of refinancing in 3 years.
4. Invest Your Tax Refund in Yourself
If you’ve explored options 1-3 and feel like you’re tip top, consider investing in yourself. No matter your career or livelihood, investing in professional or personal development can not only be personally rewarding but also may position you for greater potential earnings in your career.
Already overdoing it on the career initiative thing? Then look at some fitness and lifestyle classes or pursuits. Activities like yoga, meditation or even adult coloring books (we have a few at the office) can help improve health, improve stress levels and, ideally, reduce medical costs.
5. House in Good Financial Order? Pay it Forward
Now, this isn’t a detailed post about the tax benefits of charitable contributions. I’ll hold that for another time, though I highly recommend Charity Navigator’s overview of Tax Benefits of Giving to see what suits your situation.
That said, using a tax refund to contribute to charity will not only be deductible for next tax season (go back to item 1 and check that W-4) but you’ll be helping others in need. A worthy activity indeed.
6. Financially Independent? Tax Refund Solution for Fortunate You
If you’ve hit this milestone, pop the champagne. Research by the Pew Charitable Trust shows that 83% of Americans worry about their lack of savings. 1.
But if you’re in the 17% who doesn’t – and you’ve exhausted my above tips on how to use your tax refund – have a little fun.
One thought here: Spend on experiences rather than things. The lasting memories of the European excursion or road trip across the good ol’ US of A will be worth far more than buying that hot new tablet or 3D gadget that in a few years will end up in your cardboard box full of flip phones.
We’re Here to Help
There are other options I neglected to mention – all likely better than blowing your tax refund. You could open or contribute to an IRA account or, parents and grandparents, a 529 account. You should check with a financial expert to determine contribution eligibility.
Your tax refund could be viewed as a bonus. The reality? This was your money all along, so make sure it’s working for you all along.
If you’re ever online (mobile or desktop) and you have a financial question, feel free to reach out to me or our team of advisors. Just use the chat feature at the bottom-right of your screen.
The information is provided for discussion purposes only and should not be considered as investment advice. Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.
- Americans’ Financial Security: Perception and Reality The Pew Charitable Trust. March 2015. https://www.pewtrusts.org/~/media/assets/2015/02/fsm-poll-results-issue-brief_artfinal_v3.pdf
Published on April 6, 2017