You’ve crunched all the numbers on your tax return, and with a positive number on this line—“This is the amount you overpaid”—you’re getting a refund. It’s easy to see it as a windfall, a bit of mad money to have fun with, but remember that the refund is income the IRS has been holding since you earned it over the previous year. That said, you could decide to allocate a small percentage for a splurge.
A Sampling of Options for Using Your Tax Refund
The low percentage of Americans who have an adequate emergency fund has long been a topic in financial columns. If the amount you have available for unexpected expenses or to cover you if you lose your job is less than three months’ worth of your essential expenses, stashing your refund in a high-yield savings account may be your best option.
Paying off debt seems like an obvious top choice, but it depends on your debt-to-income ratio, the interest rate on each debt, and your overall financial picture. Paying down debt on a high-interest credit card makes sense, but making extra payments on a car loan or mortgage, which may have an interest rate under 5% if it’s more than a few years old, is probably a low-priority option.
Investing in the future, for either your retirement or your children’s post-high school education, can be a great way to make that refund work for you, especially if you are short of your targets in either category.
And if your overall financial health is good, you may be able to justify using that refund for a special purchase, from new furnishing for your living room to a nice vacation.
Planning for Filing This Year’s Return
And while you think carefully about how best to use the funds, also remember to review your tax withholdings to see if any adjustments should be made—in general, it’s best to come out close to even on your tax return, with a small amount either owed to you or by you.
If the IRS has notified you of an issue with your taxes, contact the experts at Highland Tax Resolution. We help taxpayers understand the best way to respond to the IRS. We explain all your options and the benefits of each, and we keep our clients updated with regular communication.