Great Ways to Use Your Tax Refund
The tax filing deadline is rapidly approaching. Many of you have already filed your return and you may already have your refund in hand. If you have not filed your taxes yet, you are probably procrastinating. Maybe you just hate the whole tax filing process. Or maybe you are putting it off because you owe money instead of getting a refund.
If you are getting a big refund, why? Why are you allowing the IRS to use your money for free all year long? If you are getting a refund equal to $3,000, you are giving the IRS $250 of your money every month! How much of your debt could you pay off if you had an extra $250 every single month?
The 2018 tax year is bringing a whole new set of rules and regulations—including a revised W-4 Worksheet. Stop the TAX DRAIN now! Go to your HR department and get a new W-4 Worksheet and seriously go through the numbers so you can be tax neutral when you file your 2018 return. Or check out the IRS site for calculating your withholding.
I would advise everyone to review their W-4 worksheet based on the new tax laws. Run the numbers to be sure that you are not having too much money withheld from your paycheck every month. And to also be sure you won’t owe the government a lot of money next year at tax time.
If you are getting a $3000 refund you can probably take 4-8 more exemptions. Additional exemptions will put extra money in your pocket each pay period and it’s totally legal. We must pay Caesar what is Caesar’s, and use Caesar’s rules to keep as much of our hard earned money as possible!
BUT, if you are getting a refund this year, here are some ideas for using it wisely.
Start or build up your emergency fund. Over half the population of the US can’t pay an unexpected expense of $500. With the extra money from your refund, create an emergency fund. Start with as much as you have available. Then build it to $1,000, then to one month’s salary, increase it to three month’s salary and if at all possible to a year’s salary.
Having an emergency fund keeps you out of debt when the inevitable occurs. If you don’t have an emergency fund, the only way to take care of those unexpected expenses is to use the plastic and go into debt.
If you already have a good start on your emergency fund, apply your tax refund to paying off one or two of your credit cards. Using the extra funds from your tax refund is a great way to begin a debt snowball. Start with the card which has the lowest balance and pay it off. Use the rest of your refund and add it to the minimum payment on the card with the next lowest balance. As soon as you have the second card paid off, apply the payments from the first two cards you paid off and add that to the minimum payment for the third card and begin to pay it off also. Keep going until all your plastic debt is gone.
As you are paying off these credit cards don’t ever—even for one month— create any new debt. If you use your credit card for a purchase, pay off the monthly purchase AND the snowball amount each and every month. If you can’t pay off your monthly purchases, cut that credit card up!
If you have a healthy emergency fund and no credit card debt, use your refund to increase your retirement savings. Half of all Americans have no retirement savings and for those who do have retirement savings, the median retirement account balance was only $59,000.
The average monthly social security benefit is just $1,354 or $16,248 per year. If you have saved the median retirement savings of $59,000 and you are receiving the average yearly social security payment, of $16,248, it won’t take long to use all your savings and be broke.
If possible (based on your income) use the tax refund to create or add to your Roth retirement savings account. The beauty of a Roth is that your contribution and all the gains are not taxable when you use them because you are using after tax dollars when you invest.
If you are in good shape with your emergency fund, credit cards and retirement funds, you can always use the tax refund to increase college savings for your child or grandchild or pay off your mortgage.
Too many young people are starting adult life with overwhelming student loan debt so if you can decrease their loan burden, it will certainly help them get a better start in life.
Many people think that a mortgage is a valuable thing to have because of the tax deductions on your mortgage interest, but you aren’t getting as much value as you might think from the tax deduction. In order to deduct your interest, you must itemize and the new tax law roughly doubles the standard deduction to $12,000 for an individual filer and $24,000 for married couples filing jointly. For many couples, the increase in the standard deduction will cancel out the benefit of itemizing.
And as with any money you receive from a salary, gift, inheritance or even a tax refund, some of it should be given as a gift to the Lord. In the story of the Rich Young Man, Jesus tells him to sell everything he has, give the money to the poor and come follow him as he will have created treasures in heaven. This story is all about attitude. Where is your attitude? Have you thought about tithing on your tax refund? So many charities need help to serve their demographic and fulfill their mission.
How you use your tax return says a lot about your priorities “Do not store up for yourselves treasures on earth, where moth and decay destroy, and thieves break in and steal. But store up treasures in heaven, where neither moth nor decay destroys, nor thieves break in and steal. For where your treasure is, there also will your heart be” Matthew 6:19-21.
Listen to the Compass Catholic Podcast on this topic.
