Put thought into how to spend your tax return
What to do with your tax refund?
As the year ends we start planning resolutions with the best of intentions, many which will drop off the priority list in a few months. This is also the beginning of the tax season and many will be working on getting all those documents and receipts together to process 2019 tax returns. In fact, if you use a CPA or other tax professional you likely will receive a list of important items to gather to make the processing a little more organized.
My professional opinion of tax withholding is that you should plan to get your tax refund as close to zero as possible. The reasoning behind this is simple. If you receive a large refund that essentially means you gave the government an interest-free loan. Many may consider this a forced savings account but, it would be in one’s best interest to control the household budget in such way that saving is by choice rather than overpaying tax liability in the first place. Then you would have the opportunity to make some interest on your own money. Of course, you certainly do not want a large tax bill to pay when you reconcile taxes, so make sure that you do not under withhold either. That would not be a fun check to write.
If you do expect a refund this year put some thought into how to spend that money. Wearing my planning hat, the first advice is to pay down debt. It’s that time of year many spend more than they should and, in that case, paying off debt should be highest priority. A goal equally important with debt reduction would be to fund your emergency savings account. The standard advice is between a threemonth minimum and a target of six months of the total household living expenses available in liquid for unexpected expenses. Advice to self-employed individuals or people in the construction trades would be to increase those numbers just to be safe.
Think of the financial damage of the Great Recession.
Well, now that the serious is out of the way let’s look at some fun things to do with a tax refund. You could plan a vacation somewhere you have always wanted to go. If you are planning a dream vacation maybe this is only enough to start a vacation fund. The same could be true for an auto purchase. As pricey as autos have become, this may again only serve as seed money but that’s alright you have got to start somewhere.
What about investing in yourself by continuing your education. Maybe you want to finish a degree or simply add a skill or a hobby which requires some training. Selfimprovement should be a fun endeavor. Maybe you would like to start a college savings plan for a child or grandchild.
Perhaps you have been thinking about a remodel, home repair or a replacement of some dated equipment. While most tax refunds will not pay for a kitchen or bathroom remodel, it may be enough to replace a refrigerator, stove or other appliance. If you are considering selling your house this money could go towards home improvement to make your home more marketable or be set aside to pay for your move into the new home.
It took a while to get here but yes of course, you could fund your retirement accounts. Retirement sneaks up on you and planning now for a better life later is always sound advice. For ROTH and Traditional IRA accounts you can fund these accounts up to April 15, 2020 or the day you file your tax return, whichever occurs first.
Participants in a SEP IRA may be able to fund later if you file an extension. Whatever the situation be sure to check with your team of professionals and get sound advice.
The important thing to consider is not to just blow a tax refund with frivolous spur-of-the-moment spending.
Spouses may not see eye to eye on how to use this money but remember you are in this together so be cognizant of that and know that compromise can go a long way towards peace at home.
Merry Christmas and a Happy New Year. Until we talk again, be well.