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Top 3 Things for Your Tax Refund

It won’t be long until nearly everyone in America will participate in the annual activity of filing their taxes to determine their refund, if they owe more or will break even. Most of us know ahead of filing our state and federal income taxes where we’ll fall – at least most of us have a pretty good idea. Those who will receive a tax refund may have already filed and received the refund. Those who will have to pay may wait until the very last minute. Some are just waiting with baited breath for our tax preparer to give us the news – good or bad.

But, for the sake of today’s discussion, let’s focus on those who have received or will receive that very nice tax refund. First, let’s talk about the wisdom of getting back a pretty nice refund every year. Although it’s a nice perk and maybe an expected or planned for “bonus” check each spring, it’s good to evaluate this decision.


1. Spend it…
I’d venture to say that most taxpayers who receive a tax refund annually have a “plan” (some a very loose “plan”) in mind for spending the refund the minute it comes in. Whether it’s a spring break or family vacation, catching up on bills and credit card payments, doing a needed home repair or replacement, or just thoroughly enjoying blowing the cash on whatever tugs at the heart at that moment, these all constitute a “plan”. And this may be the best way to save through the year for any of these spending options, as long as there is really a plan for those dollars that fits the bigger picture. Yes, sometimes it’s fun and a true plan to just have money to blow. If that’s the plan this year, be sure that other needed expenses aren’t overlooked for this extravagance.

2. Save it…
Saving money is always a good idea, no matter its origin. But consider the savings value of your tax refund. Using a refund to add to or start building an emergency savings account may be a very wise decision.  Most experts will say that consumers need three to six months of living expenses in an emergency savings account. For most of us, that’s a real stretch to reach that kind of goal. There’s another school of thought that recognizes that most of today’s “emergencies” are day-to-day events that could be covered with a smaller amount of money or a credit card to cover it if that is required. Things like a failed refrigerator, a minor auto accident, a sudden bout of the flu that requires additional doctor visits and medications than planned on for that pay period can and often constitute a real emergency.  So if you have no savings, consider taking this years tax refund and opening a savings account at your credit union or bank. With some savings, there’s security that at least the initial phases of just about any emergency can be managed sufficiently.

3. Adjust withholdings…
One of the smartest things any taxpayer can do is to adjust withholdings to get closer to zero on tax day.  Think about it, whether a refund is coming in annually or you are required to pay taxes on April 15th, neither is ideal.

Paying taxes every year in April requires planning to meet an additional “bill” when the date rolls around. No one wants to receive an extra bill in any month, especially a surprise bill, or one that’s potentially much larger than expected. Conversely, even though that tax refund is highly regarded by most who receive it every year, remember that the IRS is getting to use that cash all year, not you. By the way, the IRS doesn’t pay you any interest on the funds they’ve been borrowing, but if you owe them they may very well asses a penalty or interest.

If you find yourself in either of these situations, how about working it out so that you neither receive a refund nor owe Uncle Sam on April 15th.  Changing the W-4 to reflect a different withholding status isn’t that difficult. And, even though a few paydays in the current year have already passed, you can adjust your withholding at any time throughout the year. Keep in mind that you should always reconsider withholdings when you experience life changes like a marriage, birth of children, or change in jobs.

Whether the adjustment keeps you from being a borrower (in the case of a payment) or a lender (in the case of the refund) to the IRS depends on the number of personal withholdings claimed. At the end of the day, be sure to keep your money in your pocket and use it for your planned purposes.  This is one more easy way to be in control of your hard earned money!

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