There are a lot of opinions out there about tax refunds. Is it better to get a big return, break even, or end up paying a little more to Uncle Sam? We have a quick look at your best options and what to do with a refund if you get one.
Refunds vs. Breaking Even
Most financial experts will tell you it’s ideal to break even, or nearly break even, on your tax return.
This means your tax W-4 withholdings are accurate and ensure you aren’t providing the U.S. government with an interest-free loan. But for many Americans, a good-sized tax return is a nice windfall or forced savings account, even if it could mean paying income taxes on that refund the following year, depending on how you file and where you live.
If you appreciate receiving a refund after filing your taxes in April, we have seven tips to help you get the most from that money.
- Save it! Saving even a portion of your refund can help boost a savings account or add to the down payment on a car or home.
- Be Ready for Anything. Use your tax refund to grow your emergency savings account. If you don’t have an emergency savings account, start one with the refund. The goal is to have upwards of six months’ worth of expenses in that account for those “just in case” moments.
- Plan for College. Tuition and books are expensive. Whether you’re saving for yourself or a child, starting now and saving as much as possible can help you offset the cost of college. For younger kids, look into a 529 plan. These options allow you to add pre-tax dollars to the account, which can then be used for qualified college expenses.
- Reduce Debt! Put your refund toward any loans with high interest rates. It might not be as fun as buying a new television, but it could save you a lot of money in the long run. Plus, lowering your overall debt-to-income ratio can help you improve your credit score and lending options.
- Think Retirement. Add your refund to a Roth or traditional IRA.
- Be Business Smart. Have you always wanted to start a small business or side hustle? That refund could be your ticket.
- Make Home Improvements. One of the biggest investments in your financial future is your home. Some updates can actually increase the value of your property, adding to your equity. Smart options include kitchen remodels, new garage doors, exterior paint, updated bathroom fixtures, as well as new heating and cooling options.
Taxes and returns can be complicated. Check with a tax professional for help with your specific return and tax liability, or contact the Internal Revenue Service (IRS).
Boost Your Financial Wellness
More Financial Wellness Matters blogs on topics ranging from financial self-care to protecting your financial health are coming soon. Twice a month, we’ll dig a bit deeper into the relationship between financial health and overall well-being, shedding light on the behaviors and beliefs that drive money relationships. With simple tips and proven insights, we hope to enhance your financial well-being and help you live a healthier, happier life.