The 2019 tax filing season is about to kickoff. Barring any hangover impact from the longest government shutdown in history, the IRS will start processing tax returns on Monday, Jan 28, 2019. If prior years’ payout is any indicator, hundreds of billions of dollars will make their way into individual checking accounts in the form of tax refunds over the next four months or so.
There is longstanding debate over the merits and demerits of granting Uncle Sam an interest-free loan but that is not the purpose of this article. Assuming you are expecting a tax return this season, here are a few pointers on how to put your tax refund to good use:
- Pay down debt. Make an extra payment on your consumer debt. Decide which form of consumer debt (student loan, credit card or mortgage) you will tackle and apply the payment promptly. This move could yield multiple benefits such as lower credit utilization, a credit score boost and an increase in your net worth.
- Supplement your retirement savings by opening an Individual Retirement Account (IRA). Do you need to catch up on socking money away for retirement? Lump sum contributions to an IRA will help make your retirement goal more achievable. Invest your refund in an IRA and let your money work for you.
- Open a college fund. Jumpstart college savings for your child (ren) or other dependent. Starting early and making regular contributions to a qualified tuition plan (commonly known as 529 plan) helps make college more affordable. You can open a 529 plan for as little as $25 per month and maximum contribution limits are typically north of $200,000 per beneficiary. The contributions grow tax-free and many state-sponsored plans offer tax deductions on your state taxes. For example, participants in New York sponsored 529 plans may be eligible for up to $5,000 ($10,000 for couples filing jointly) in state tax deduction.
- Give to charity. Have you always wanted to make a donation to your alma mater or favorite charity? Part of your refund can be applied to turn this wish into reality. Giving in support of a worthy cause has a highly-gratifying feeling. In addition to that, such donations are often tax-deductible, helping to reduce your future tax bill.
- Contribute to an emergency fund. How much do you have set aside for unplanned expenses? Finance experts recommend putting away at least 3 to 6 months of living expenses to cover unforeseen events – job loss, illness, home repairs, etc. Your tax refund could be a welcome funding source for creating that much-needed cushion against unexpected expenses.
- Make energy-efficient home improvements. For homeowners, improvements such as insulation, sealed windows and doors, roofs, etc. help reduce utility expenses and may qualify for a tax credit.
- Save towards big ticket purchases. Set some money aside for future planned big ticket purchases such as new living room furniture, kitchen remodeling or that wedding anniversary cruise. Such careful planning will enable you to enjoy your purchase without dipping into your savings or going into credit card debt.
Decide what you will do with the money before it hits your account. No matter the size of your tax refund, a little careful thought will help to make it go a little further and leave you with the satisfaction of having put it to beneficial use.