In the Money: Tax Refunds
If you are expecting a tax refund this year, it is great to have a plan for the money. Remember though the government is not sending you a bonus check, but rather money that should have been yours all along.
The Good:
If you are expecting a tax refund, congratulations! So, you now have a surplus of money, here are several financial priorities you may want to consider:
Create an emergency fund: many Americans do not have an adequate savings account accessible in case of a sudden financial need.
Pay off debt: if you are carrying a credit card balance, consider using your tax refund to pay that off.
Fund your retirement: you can use the funds to start or augment a Roth or traditional IRA.
Future planning: you are not the only one that needs to prepare for retirement, your children (if you have them or plan on having them in the future) can also start to plan now. Compound interest and starting young can be a great approach for well-funded golden years.
Buy life insurance: life insurance can be easily overlooked, especially for younger people in the work force. A term policy can provide protection for loved ones at a relatively low cost.
Spend it on something you want: you saved all year, you do not have to feel guilty about using the extra cash for a vacation, which could include visa and passport fees.
The Bad:
If you are receiving a large refund, you are most likely having too much money withheld from your paychecks. The bad part about getting a tax refund is that you did not earn ANY interest on the money YOU overpaid, but your Uncle Sam did. If this is not what you prefer, be sure to revisit your W-4 form and adjust the federal income tax withholding exemptions. The more exemptions you claim, the less money will be withheld from each paycheck which means receiving MORE in your paychecks.
In summary:
The IRS encourages everyone to perform a quick “paycheck checkup” which is especially important when the tax laws change. You can use this tax withholding calculator from the IRS for guidance on how many you should have. Checking your withholding can help protect you from having too much withheld up front and face a unexpected tax bill or even more frightening a penalty. Doing so will allow you to pay only what you owe and can result in a higher paycheck amount every pay period, so dig for those dollars!
Disclaimer: this is intended for informational purposes only and should not be construed as personalized investment, legal or financial advice. Please consult your investment, legal and financial professional(s) regarding your unique situation.