Smart Ways to Take Advantage of Your Tax Refund

Author: Teresa Mears

Tax season is a time of stress for many, but it can be a joyful time for the roughly 75 percent of Americans who receive income tax refunds.

While the refund really means you’re getting back money you loaned to the government at no interest, in practical terms it often means an unexpected infusion of cash into your wallet or bank account. Last year’s average income tax refund was $2,755, according to the Internal Revenue Service. That’s a nice chunk of change.

It’s a great problem to have: What do you do with your windfall?

The best choice for one person may not be the best choice for another. But experts agree on one thing: If you have debt, apply your refund to paying it off, whether it’s credit card debt, student loan debt or other consumer debt. “People should still be focusing first on paying down debt,” says Meisa Bonelli, a Wall Street finance and tax professional whose Millennial Tax company advises entrepreneurs on business and tax strategy.

Debt, particularly student loan debt, should be a primary target because it limits financial options, preventing people from doing what they want with their money, whether it’s buying a house, buying a car or taking a vacation. “Get that debt gone,” she says. “It holds you back from everything else you want to do in life.”

Eric Rosenberg, a financial analyst who writes the blog Narrow Bridge Finance, agrees. “The No. 1 thing anyone should do with a tax refund is pay down debt,” he says. After he left graduate school with $40,000 in student loan debt, he focused on aggressively paying it off. Using all his tax refunds and bonuses, he made the final payment just two years and six days after his graduation.

With his student loan debt cleared away, he began saving his tax refunds, with the goal of buying a home. He didn’t apply any of his refund money to splurges; instead, he saved for fun and vacation with his regular income. The refunds were earmarked for bigger things.

“I treated it like it was extra money that I didn’t need to live on,” Rosenberg says. “I always encourage people to think long term, not short term.”

Others believe that giving yourself license to splurge with part of your refund helps you save the rest. Stephanie Halligan, a financial consultant and blogger, signs a contract with herself before she does her taxes, allocating 50 percent of her refund to student loans and 25 percent to long-term savings. She can spend the remaining 25 percent on whatever she wants.

“It’s easy to react on impulse and emotion when your refund hits, so prepare now for what you’ll do with that moolah later,” she advises on her personal finance website, The Empowered Dollar.  If you’re getting a big refund, a check in the ballpark of $1,000 or more for taxpayers who don’t have a side business, consider adjusting your withholding so that you’ll have that money available to you during the year. But those who don’t have substantial savings want to avoid a scenario in which they owe four figures to the IRS at tax time.

“I think people should withhold the maximum they can withhold,” Bonelli says. Rosenberg concurs. As his businesses, running Narrow Bridge Finance and building websites, have grown, his refunds have shrunk. Last year he had to pay the IRS.

Here are the seven smartest things you can do with your refund:

Pay down debt.

If you have any consumer debt, student loans, credit card balances or installment loans, pay those off before using your refund for any other purpose. Car payments and home mortgages aren’t in this category, but you can consider paying extra principal.

Add to your savings.

“You can never save enough,” Bonelli says. You can use the money to build up your emergency fund, your kids’ college funds or put it toward a specific goal, such as buying a house or a car or financing a big vacation.

Add to your retirement accounts.

If you put $2,500 from this year’s tax refund into an IRA, it would grow to $8,500 in 25 years, even at a modest 5 percent rate of return, TurboTax calculates. If you saved $2,500 every year for 25 years, you’d end up with more than $130,000 at that same 5 percent rate of return.

Invest in yourself.

This could mean taking a class in investing, studying something that interests you or even taking a big trip. “Do something that enriches yourself or adds value to your life,” Bonelli says. She is planning to take a class in art therapy this year using money from her refund.

Improve your home.

Consider putting your refund to good use by adding insulation, replacing old windows and doors or other improvements that would save energy, and therefore money. Or perhaps it’s time to remodel your bathroom or kitchen. You’re adding value to your home at the same time you’re improving your living experience.

Apply your refund toward next year’s taxes.

This is common among self-employed taxpayers, who are required to pay quarterly taxes since they don’t have taxes withheld. By applying any overpayment toward upcoming tax payments, you can free up other cash.

Splurge on something you’ve always wanted to do.

If you’re out of debt and have substantial savings, this may be the time to take the trip to Antarctica or Australia that you’ve always dreamed of taking. Such an experience can be life-changing, and you never know what impact it will have on your future until you actually do it.

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This article originally appeared at http://www.dailyfinance.com/2014/03/31/smart-tax-refund-strategies/; reprinted by permission.

What a Wonderful World

Originally Published in Flourishing May/June 2013

As many of you know, we are members of The Golden Circle, a group that provides support for a series of events performed by the South Kansas Symphony, led by Dr. Daniel Stevens.  Daniel is doing a fantastic job, both with the South Kansas Symphony and with the Southwestern Youth Symphony.  And, Daniel is himself a wonderful musician. 

Anyway, at this season’s finale, Daniel presented me with a plaque which says simply, “Life Is Good”.  Daniel said that he chose that message, because I’m always smiling.  He couldn’t have paid me a higher compliment.  Why do I mention this?  Simply to establish my credentials as an optimist.  And, yes, I am bragging.  Optimism is a state of mind, and as such, it is not something you’re born with; it is something you work to develop. (Ask my children, I used to be grumpy.)

But, did you ever hear me say that we don’t have problems?  No, you didn’t, and you have no idea of the troubles I’ve seen.  Nor will you, because I don’t allow trouble to define me.  Indeed, part of my job as your advisor is to help identify your troubles and aspirations, to put both into a rational perspective, and deal with them in a positive way.

So, the issue I hear about most frequently from clients is that our federal  government continues to spend irresponsibly—as it has for most of my lifetime.  But, now it’s worse than ever.  As Ben Stein’s economist father, Herb, famously said, “If something can’t go on forever, it won’t.”  But, life will go on;  and here’s the key point—BETTER THAN BEFORE.  That will be true, because it has always been true.  That is my faith.

Still, according to the federal government’s own actuaries, unfunded liabilities for things like Social Security and Medicare and federal employee pensions now exceed $87 trillion. That doesn’t include the official $16.7 trillion national debt.  The population is about 315 million people. Not counting the official $16.7 trillion national debt—and not allowing for cost-of-living adjustments—the average American owes over $275,000 for America’s unfunded liabilities.  (I’m not counting PPACA (Obamacare), either, but that’s an issue for another day.)

Looking at this more optimistically, I realized that if I’m the average American, Uncle Sam owes me $275,000 in future benefits.  So, here is my offer: The government says my life expectancy is another sixteen years.  Pay me now, instead of later.  I’ll even take a haircut.  In lieu of all future benefits, pay me today with a $100,000 Treasury bond with a guaranteed rate of 5% (the long-term historical average) and maturing in sixteen years.

Over sixteen years, I’ll collect $80,000 in interest on which I’ll pay tax at the optimistic rate of 25%.  The Feds will get back $20,000 in income tax payments, leaving a net cost of $160,000 ($100,000+80,000-20,000).  If I don’t live sixteen years, my heirs can either sell the bond in the open market or hold it to maturity.  And, let’s be fair about this:  Give every American citizen the same haircut, with the face amount and the maturity of each person’s bond based on today’s life expectancies.  I haven’t figured out how to treat people born tomorrow and the next day, but…

…I realize that the real solution needs to be a bit more sophisticated than my example here.  Whether my proposal is adopted or not,  you can be sure that something like it—a haircut for virtually everyone—will have to happen at some time, because as Ben Stein’s dad told Nixon, “If something can’t go on forever, it won’t”.  And, that’s really a good thing, because…   

…out of fiscal necessity, I’m convinced that America must and will find a way to return to its founding ideals of self-determination and family responsibility.  The $trillions now committed to a very long list of wasteful entitlements—not to mention countless other stupidly expensive commitments—will be free to flow into privately funded miracle cures and “for profit” space stations; to name just two possibilities. But until then, don’t waste your mental energy on things you can’t control.  Ignore the “news”, if that’s what you have to do, and force yourself to notice and appreciate the good things in your life.  As my first self-help mentor, Earl Nightingale, always advised, “Begin each day with an attitude of gratitude”.  It really is a wonderful world out there—and that’s why I’m always smiling!  mh

Boomer Dis-Entitlement

Originally published in Flourishing July/August 2012

When I was growing up in the 1950’s, retirement as we think of it today was a rarity.  According to a poll taken in 1950, most workers aspired to work for as long as they were physically able.  Quitting was for the disabled and infirm, and so was Social Security.  Neither normal life nor the government offered decades of uninterrupted leisure.

But, since 1960, the percentage of men over age sixty-five still working has been cut in half.  My own father, who was born in 1917, retired at age sixty-four.  Probably due to the recession, average retirement age has risen recently from sixty-two to sixty-four.  That still gives the average man nearly two decades in retirement.  The average woman can expect even more. 

With Social Security, Medicare, and both corporate and public pensions, we have created a large new class of societal dependents.  These promised, but mostly unfunded, benefits have already bankrupted dozens of companies, and now have our nation careening toward fiscal disaster. Yet, current beneficiaries are so insistent—perhaps justifiably in most cases—that their benefits be maintained or even increased, that few politicians have the courage to say what everyone knows:

Those payments can’t be sustained much longer.

Our children and grandchildren are working to pay our benefits, knowing full well that the country can’t afford to pay those same benefits to them.  And yet, generationally speaking, we have the cheek to question their drive, ambition, and willingness to save.

Frankly, I don’t see any lack of ambition or a lack of a savings discipline among the young people I work with; but what I’m saying here is that it’s time to tell ourselves the truth about what we’re doing to all of our children and grandchildren.  If we boomers are to have any credibility with our kids, we’d better be willing to share the burden with them.  So, are you sitting down? 

Boomer entitlements, specifically our future Social Security and Medicare benefits, will be reduced—or better yet—phased out and replaced entirely in coming years.  (See The Chilean Model in our May 2011 issue.)

I’ll have much more to say on the issue of retirement income and boomer entitlements in future issues of this newsletter.   mh

Web Tips

Originally published in Flourishing January 2012

Are you wondering how working while collecting Social Security will affect your benefits?  Are you having trouble managing all of your monthly expenses?  Perhaps you want to start an education savings plan for your child or grandchild, but are wondering which type is right for you.  To help with these difficult questions, Family Wealth Management LLC has a wealth of resources available to you on our website.

Simply go to http://www.lpladvisorweb.com/michael.harvey/ and click on Downloads in the Client Center drop down menu.  Available to you at no charge is information on retirement plans, long term care insurance, Medicare, Social Security, estate planning, education funding, and much more. 

The information is in easy to view formats, such as PDF and Excel spreadsheets.  Some, like the Monthly Budget Spreadsheet, can even be personalized for your unique circumstances.  Visit our website often, as we’re always looking for, creating, and adding new and useful content to help you manage your money.  ab