The Internal Revenue Service has paid out more than 85 million refunds as of April 11, with each refund averaging more than $2,700. If you've received a refund or are expecting one, you have many options for using the money -- some can even save you taxes on your 2014 return. Here are 10 options:
1. Learn a tax lesson.
Receiving a refund feels a lot better than writing a check to the government, but it isn't a smart tax strategy. A refund is an interest-free loan you've made to the government. It would have been better to have access to your own money throughout the year by more accurately estimating your final tax bill. Looking ahead, you may want to adjust 2014 wage withholding and estimated tax payments so you won't have to wait until 2015 to recoup your overpaid 2014 taxes.
2. Get a jump on 2014 taxes.
If you usually pay estimated taxes, consider applying your 2013 refund toward your 2014 estimated tax payments. This can be done by following the directions on your tax return if you haven't yet filed. Or you can simply add the funds to the account from which you pay your next estimated tax bill. The due date for the second installment of estimated taxes is June 16, 2014.
3. Increase retirement savings.
You can use the refund to contribute to an traditional IRA or Roth IRA if you are eligible to make a contribution. While you have until April 15, 2015 to add money for 2014, the sooner the funds go into the account, the more tax-deferred (for a traditional IRA) or tax-free (for a Roth IRA) income you'll earn. And, if you contribute to a traditional IRA, you may reap a tax deduction for the contribution on your 2014 return.
4. Save for higher education.
It's challenging to set aside money for your own or your child's education. The refund windfall can be contributed to a 529 plan or Coverdell Education Savings Account to help pay for future education costs. While there is no federal tax break for making such contributions, there may be state income tax breaks. And funds withdrawn from these accounts to pay for qualified education expenses are tax-free.
5. Fund a health savings account.
If you are covered by a high-deductible health plan, you can fund a savings account called a health savings account to pay for medical costs not covered by insurance. The tax law caps what you can contribute annually, depending on whether the plan covers only you or you and your family and whether anyone covered is 55 years or older. Contributions are tax deductible, even if you don't itemize other medical costs.
6. Create or increase an emergency fund.
Financial experts advise everyone to have an emergency fund to cover your expenses in case of an unexpected catastrophe. Some say a six-month fund is sufficient; others advise having 12 months of savings in the bank. A tax refund can help start or add to your personal emergency fund.
7. Give to charity.
You can give your refund to your favorite charity. The contribution is tax deductible if you itemize deductions on your 2014 return. Check with the IRS to see whether the charity is eligible to receive tax-deductible contributions.
8. Better yourself.
You may be able to get a better job if you take courses or get certain certification; refund money may help you swing this investment in yourself. Depending on the courses, you may even gain a tax write-off for this action. The rules for education costs are in IRS Publication 970.
9. Replace an old appliance.
An old refrigerator or washing machine may be costing you money because of high energy usage; a newer model may be less expensive to run. Consider using a refund to buy a needed item.
10. Take a vacation.
Some people need the lump sum of cash that a refund affords in order to pay for a vacation. Depending on the size of your refund, your trip may be camping in a national park or cruising in the Caribbean. In any event, enjoy!
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