It’s tax time. If you are looking forward to a refund, like 75% of Americans, you are probably already planning how to spend it. Terry Selb is a tax relief attorney who is a senior partner for American Tax Solutions. He’s here to explain the top 5 smart ways to spend your refund.
1. Pay off Debt
Paying off debt, particularly high-interest debt, is a great way to use your refund. When it comes to what to pay off, there are a few options.
It’s usually best to pay off the highest-interest debt first because this costs you the most. Credit cards are often the highest interest, with an average interest rate of 19%.
However, you can also choose to pay off debts with the smallest balance because it gives you a feeling of momentum.
2. Emergency Fund
An emergency fund is one of the most important components of a sound financial plan. If you have an emergency, having savings in an emergency fund can make dealing with it much easier.
Selb recommends setting an initial goal of $1,000 if you don’t have an emergency fund. Over time, you should have enough for 3 to 6 months of expenses.
Your emergency fund should exist separately from retirement or a standard savings account. It should be strictly for emergencies.
3. Add to a Retirement Account
It’s never too early to start saving for retirement. Retirement may be years away, but this strategy offers a more immediate benefit as well.
Investing in your retirement account can also help you boost next year’s tax refund.
You can deduct up to $7,000 for investments in a traditional IRA.
You can also receive a $1,000 or $2,000 if filing jointly, credit by investing in an IRA or other qualified retirement plans. This is known as the Savers Credit.
4. Save for College
Perhaps you have children, or perhaps you’ve been dreaming of pursuing a degree yourself. In these cases, your tax refund can also allow you to start a college fund.
College tuition prices continue to climb, and 42 million Americans have student loan debt.
Terry Selb states that a 529 plan allows you to make tax-free contributions and withdrawals for qualified expenses. The 529 doesn’t impair the student’s ability to receive financial aid, so there’s really no downside.
5. Keep it at Home
This doesn’t mean you should stuff your tax refund under your mattress. It does mean that you should consider investing in your home. You can use your tax refund as a downpayment on a large remodeling project or fund a smaller renovation.
In addition to making your home more enjoyable, remodeling also increases its value. The average ROI for a home remodel is 70%. However, some projects, particularly additions, can increase a home’s value by as much or more than what the remodel costs.
Terry Selb is a senior partner with American Tax Solutions. The company helps individuals and small businesses navigate tax laws and negotiate with the IRS. Before joining the company, he spent 20 years aiding small business clients with tax and other financial issues.