Tax Tip of the Week | No. 406 | Great! You Received a Refund. Now What?

Tax Tip of the Week | May 10, 2017 | No. 406 | Great! You Received a Refund. Now What?

First and foremost, the goal, according to most CPAs, is to NOT get a refund. While many people love getting a large chunk of change every spring, it indicates you’re overpaying and essentially giving the government a tax-free loan. Getting a very small refund means you’re paying the IRS exactly the right amount. Of course situations change from year to year so you might not always get it right.Too late, I’m getting a refund. Now what?If you do receive a refund, there are a number of ways to make the most of it:Clear your slate. If you have any high-interest debt (think credit cards), pay it down. If you own a home and have a mortgage, consider making an additional mortgage payment for the year. It will help cut down on the amount of interest you pay over the course of the loan. You may also want to consider paying off student loan debt or car loan debt, depending upon your interest rate.Consider investing your refund to help your money grow. There are many tax beneficial investment vehicles to consider, such as a traditional or Roth IRA, 401(k), etc. A CPA/PFS can help you with financial planning. Whether this means squirreling the money away in retirement accounts, college savings plans, or in a regular old savings account to help you grow your nest egg, you can’t go wrong.Make a strategic purchase. Driving a 15-year-old car? Need to upgrade your 5-year-old laptop? Looking to make home improvements? Using your refund to make a large, well-thought-out purchase may be the way to go.Make memories. Do something fun! If you are working hard toward building your savings and have paid down debt, don’t be afraid to earmark some of your refund for a vacation or other experience. A recent survey shows kids remember the vacations they go on with their families way more than they remember “stuff.”Adjust your withholding and/or estimated tax payments. Speak with your CPA about how to get closer to the goal of zero refund in the future and what adjustments need to be made during 2017. Plus, if you’re like most taxpayers who pay the IRS via payroll withholding, having a little more money in each paycheck is nice.Things to avoid doing with a refund:Making a large purchase when you have outstanding high-interest debt (i.e., living beyond your means);Heading to the casino;Loaning people money (at least avoid loaning non-deserving people money);Letting it sit in a zero-interest account;Buying a boat/pool/other large purchase that could increase your liability insurance and otherwise cost you a ton of money in maintenance.While it might be a drag to take a cautious, responsible approach to a tax refund, it is an investment in your financial well-being, which is something you’ll never regret.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.Rick Prewitt – the guy behind TTW...until next week.