Making the Most of Your Tax Refund

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By Leigh Guth, Extension Agent, Lincoln County 

Palms get itchy this time of year with folks anticipating their tax refund. All too quickly the refund is here and gone again, spent as quickly as it came. It is important to remember, especially this time of year, that a tax refund is not “free money” – rather it is the return of earned income. Agents, this year, help others develop a plan for saving the bulk of their refund. For example, by taking a small amount – perhaps 20% – to use that for a fun purchase or a vacation. But, by saving the remaining 80% of the refund, taxpayers can begin improve their family’s financial situation. Here are some considerations to share with your clients:

Look at your financial health and consider the year ahead.

What debts are you paying off?  Do you have a high interest credit card or loan?  Check out PowerPay.org to see how much money you would save in interest by paying a lump sum toward your debt. Power Pay will show you which loan you should target and how much quicker you will pay off your debt by using your refund as a debt payment.

What crisis could come along?

Do you have six months’ worth of living expenses saved for an emergency?  What if you were to lose your job?  What if you need to repair your car, replace your washing machine, or have a major medical expense? Could you pay for those things without resorting to your credit card?  A tax refund is a great way to start an emergency fund that would help handle any of these events.

What big events are planned this year?

Is there a wedding, summer trip or a graduation in the future?  Use your tax refund to open a savings account for this purpose. With a lump sum to start you on your way, adding a small monthly amount can make saving for a special occasion a cinch.

Are you saving for your retirement or your child’s education?

This tax refund could make a great impact toward any savings goal and can have a positive effect on your taxes for next year.

As discussed in a recent post , by using direct deposit for your tax refund, you are already taking a step toward success!  Directly deposited refunds arrive faster than a mailed check. By using an IRS Form 8888, you can assign your refund to up to three different bank accounts.  So, you could send 20% of your tax refund amount to a checking account reserved for discretionary purchases, then, send the remaining amount to a retirement account or savings account. You can also use this form to purchase up to $5,000 of U.S. savings bonds to add to your retirement or education savings. Now, you are already on your way to improving your financial health in 2012!

Agents, the National Financial Management Core Competencies addressed in this blog are:

  • Saving: relationships with financial institutions, plan for retirement, child’s education, and other needs, plan for long-term goals
  • Borrowing: plan and meet your payment obligations
  • Protect: build up an emergency fund

As you can see, sharing the information in this blog with your clients will help them build competencies in three of the national competency areas: (1) Saving, (2) Borrowing, and (3) Protect.

What are some of the ways you can share this information with your clients?

Resources:

Bird, Carolyn L. Getting the Most from Your Tax Refund (FCS-528-01). Raleigh: North Carolina Cooperative Extension Service, NC State University.

Smart Uses for Your Tax Refund. North Dakota State University, Extension Service. December 2010. 

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