In 2012, the IRS estimated the average federal tax refund to be about $2,700. That’s equal to more than one month’s worth of income for 66 percent of taxpayers—or more than three months of groceries for an average family of four. Of course, you could adjust your W-4 so you have fewer taxes withheld. However, struggling taxpayers often have a difficult time holding on to that extra money when it’s included in their paycheck instead of receiving it in a lump sum.
Here are eight tips to help you decide—and plan ahead—for what to do with your tax refund:
1. Put money into savings. Forty percent of U.S. households live paycheck to paycheck, and more than one third admit to rarely being able to save money. A tax refund represents a once-a-year financial opportunity for Americans to put money away for a rainy day. Having an emergency fund available will go a long way to ease stress over unforeseen expenses down the road.
2. Pay down high-interest debt. If you have credit card debt, consider using your refund to pay down debt on whichever cards charge the highest interest rates.
3. Increase retirement account contributions. Consider contributing more of your income to a regular or Roth IRA, increasing your contributions to a 401(k) or squirreling away some savings for retirement.
4. Contribute to a Health Savings Account (HSA). HSAs are a great way to set aside money for future medical expenses, as the funds aren’t subject to federal income tax at the time of deposit. Contributing to an HSA isn’t as important as paying down credit card debt or increasing your retirement contributions, but an HSA is still a good way to use your tax refund if you’re eligible to participate in one.
5. Invest. If you’ve avoided debt and have a robust retirement account, consider opening a brokerage account and start investing your refund for the future.
6. Improve the value of your home. Have you been putting off that kitchen remodel or bathroom upgrade? If so, consider applying your tax refund toward home improvements. It will improve the enjoyment of your home and can significantly increase your home’s value.
7. Take a vacation. If you’ve already paid down debt, increasedyour retirement savings and in general been responsible with your money, great—you’ve earned a vacation. It’s always important to reward yourself, especially if you can take a trip without spending more than your tax refund.
8. Start planning for next year. Now that you’ve completed your 2012 tax return, start thinking ahead for next year’s return. Now is a good time to start tracking your tax-related receipts through the year, if you haven’t done so already. This will help reduce your tax liability and put you in an advance position to meet next year’s deadline.
Lisa Greene-Lewis is a CPA and TurboTax Tax Expert. She has more than 15 years of experience in tax preparation, including positions as a public auditor, controller, and operations manager. For more tax-related tips, go to blog.turbotax.intuit.com.
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