19 Mar 8 Best Uses of a Tax Refund
Ever wonder what are the best uses of a tax refund? How to use tax refund wisely?
The IRS issues tax refunds if you have paid more taxes than what you have owed. This usually happens when your employer has withheld too much tax from your paychecks. For low and moderate wage earners, a refund may be imminent if you are eligible for a refundable Earned Income Tax Credit (EITC) regardless of whether your employers automatically withheld taxes or not. Thus, even if you belong to a lower income bracket and are not required by law to file a return (as may be the case for students or part-time workers), you may still be entitled to a refund if your employer withheld excess taxes or if you qualified for an EITC.
However, since the IRS does not automatically issue refunds, the key to confirm if the government owes you money lies in the filing of your tax return.
Claim it or Lose It
The IRS says that they are sitting on about $1.1 billion in unclaimed federal income tax refund – and the clock is ticking. Could part of this be yours?
The IRS reported that an estimated 1 million taxpayers who failed to file their 2014 federal income tax returns might be collectively owed back $1.1 billion in tax refunds. The estimated midpoint for the unclaimed refund is $847, which means that half of the number of tax refunds are more than $847 each and the other half are less. This figure does not include the money owed to those who may be eligible to claim EITC, the maximum credit amount of which was $6,143 for 2014.
And the only way for these taxpayers to collect the refund is for them to file their 2014 returns first. The law provides most taxpayers with three years to claim a refund. Thus, if you have overlooked filing for 2014 (or were not required to do so) but now think that you may be entitled to a refund, then you have until Tuesday, April 17, 2018, to file accordingly. The good news is, if you file and are owed a refund, then you don’t have to pay the penalty for late filing!
If you fail to claim the refund within the prescribed period, then the US Treasury will keep the money. It’s good for helping out with the fiscal deficit, but you can find best uses of a tax refund.
Claim it then use it
Now, for those of you who are current in their filings and have already submitted their 2017 returns, you are probably anticipating and asking, “Where is my Refund?”
According to the IRS, they issue more than nine out of 10 refunds in less than 21 days from receipt of the return. However, there may be delays in processing your refund if they find that your tax return has issues such as missing/incorrect information, mathematical errors, and potential identity theft or fraud. It would also take longer for the IRS to receive and review your return if you sent it via mail (instead of e-filing) or mailed it to the wrong address. The refund might then take longer to reach you if you opted to receive it via check which still has to make its way through the mail system (as opposed to the faster and safer Direct Deposit method). To track the status of your refund, you can use the “Where is my Refund?” online tool or download the IRS2Go app.
The 2016 IRS Data Book indicates that the average amount of claimed individual income tax refund for the said fiscal year was about $3,050. Assuming that you receive a refund around that amount, what would
be the best uses of a tax refund? Here are some suggestions on what to do with your tax returns?
1. Become debt-free – Pay off your bills and high-interest debt. Pre-pay your mortgage or your car loan (just make sure there are no early payment penalties). Use your refund to achieve a clean slate financially.
2. Get some peace of mind – Build your emergency fund. They have to be good enough to cover at least 3-6 months worth of expenses. Fill gaps in your insurance – be it for your home, car, health, or life, purchasing insurance protects yourself and your loved ones. Boost your 401(k) retirement fund by investing in a Roth or traditional IRA. Invest in a college plan for your children or set up a state-sponsored 529 plan.
3. Invest for a return – Open a brokerage account and invest in a stock portfolio. Look into mutual funds or exchange-traded funds. If you want to diversify further, you can also check US Savings Bonds or Treasury Bonds for long-term investments.
4. Start a business – One of the best uses of a tax refund is to use the refund as seed money to start that venture you’ve always dreamed of. You can start small and work on your passion projects on the side.
5. Make home improvements – If you live in an older residence, you can use your refund to replace inefficient appliances or take on small improvement projects to make your home more functional. This would make your house more energy-saving and valuable in case you decide to sell.
6. Invest in yourself – Use your refund to study a college course, pursue additional certifications, or learn new skills to increase the value of your human capital. You can also use it to gain learning and enriching experiences through travel or events, but don’t get carried away and spend it all on one luxury trip.
7. Save for specific items – Create a list of things that you need to save for big-ticket purchases like vacations, cars, etc. Divide your refund money into several savings accounts, and be disciplined enough to contribute to these accounts each month.
8. Donate – Give to a cause that you care about. This will make you do good and feel good. After all, you can also claim this as a tax deduction for next year.
You may be all giddy with the idea of receiving your tax refund “windfall” and have probably spent it all in your mind already. But don’t make any major commitments just yet, because refund delays can happen. It is also important to remember that your refund is not a “gift” from the government.
After all, you worked hard to earn it throughout the year, and the IRS is just returning your own money back to you. That’s why it’s great to know the best uses of a tax refund.
So go ahead, file your return and claim the refund that is owed you. But use it wisely.