Tax Time: What Should I Do with My Tax Return?
January 28, 2016
Eileen L., Financial Expert
The word “taxes” strikes fear into a lot of people. But that doesn’t have to be you! Between now and Tax Day, we’ll be covering some common tax questions we get at the Credit Union, including options for IRAs. But first, let’s talk about something fun: tax returns.
You get a tax return (also called a refund) if, at the end of the year, it turns out that you paid too much in taxes. The government gives you the extra money back. If you perfectly estimate your taxes when you fill out your W-4, you won’t pay any extra and you won’t get a tax refund. You can estimate your taxes using the IRS’s Withholding Calculator. It’ll tell you how to adjust your W-4 if you want to shrink your tax return. Instead, you’ll keep more money in each paycheck and pay less toward taxes.
If you are getting a return this year, it’s a great way to reach your financial goals! Since you paid the money out of your paycheck last year, it’s like you put money away in a savings account all year. I never pay attention to taxes throughout the year and it’s exciting to learn I'm getting money back. Now you can decide what you’re going to do with it.
Remember a few weeks ago when I posted about savings goals? It doesn’t sound that exciting, but your tax refund can jumpstart your savings. The average tax refund in 2015 was over $2,800. Say you pay $700 per month in rent. Putting $2,800 in your emergency fund gives you 4 months of rent money in case of an emergency. That can make a big difference. Or, maybe you’re saving $10,000 for a down payment to move out of your apartment. If you save a $2,800 tax return, you’re already 25% of the way to your goal.
Even if your tax return is only a few hundred dollars, any savings is good savings.
Pay Off Debt
Okay, so saving the money for a rainy day or toward a specific goal isn’t that exciting. What about paying off some debt with your tax return? Many people build up debt over the holidays. Pay it off faster with your tax refund. Of course, your tax refund will be different from year to year. It’s not a good idea to count on paying off any holiday debt with your tax return since it’s not a guaranteed amount. Plus, being debt free feels great!
Sometimes, the best option for your tax return is to spend it. I know I have a list of things I need to buy but have been putting off. Maybe it’s a new couch or new carpet. Maybe it’s a plane ticket to go see your parents. If you use the money from your tax return, it might mean you don’t have to use a credit card and pay interest. That’s a financial win.
The most satisfying way for me to use my tax return is to split it up for different things. I take part of my return and put it toward my most important saving goal, then put part of it toward any debt I have. But, I make sure there’s part of my return that I can spend how I want. This year, I’m using part of my tax return to book a trip to visit my sister.
Remember, if you have specific questions about your taxes, the best person to ask is your tax advisor! While we can help you set up an IRA and other accounts that might affect your taxes, we aren’t tax professionals. (We don’t know everything! Just almost everything.)