Tax Hacks 2014: The 10 Dumbest and 4 Smartest Things You Can Do With a Tax Refund

Photo (cc) by jlegate

According to the IRS, the average American tax refund for tax year 2013 is about $2,600. But whatever you’re expecting this year, there are smart things you can do with it, as well as things that aren’t so smart.

Here are some of each, along with some advice on how to check on the progress of your refund if you’ve yet to receive it.

Start by watching the following short video that provides three good and three bad things to do with your money. Scope it out, then meet me on the other side for more.

Now that you’ve seen the short lists, let’s expand them.

10 dumb things to do with your tax refund

1. Spending it rather than investing it

Saving might not be as much fun as shopping, but think about this: If you invest a $3,000 refund every year and earn 10 percent annually, in 20 years you’ll end up with an extra $189,000. That means retiring three years earlier, if you can live on $63,000 a year. Hmmm … some shopping, or three years of paid vacation?

To learn more about investing, check out some articles on investing here.

2. Spending it rather than paying down debt

Every dollar you pay in interest makes your credit card company or other lender richer. Every dollar of debt you pay off makes you richer. While there’s no guarantee you can earn 10 percent if you invest your tax refund, here’s a sure thing: If you’re paying 15 percent interest on a credit card, paying it off is the same thing as earning 15 percent, tax-free and risk-free.

3. Spending it on something that won’t lower next year’s taxes

Can’t stand the thought of not going shopping? Then buy something that will improve your home and generate a tax credit at the same time.

Example? A solar water heater might set you back $3,000 to $5,000. But it will save you about 20 percent on your electric bill for years to come, and get you a tax credit next year equaling 30 percent of the cost. So if you spend $4,000 on a solar water heater, next year’s tax bill will be $1,200 lower.

To learn more about things that qualify for tax credits, see this page of the Energy Star website.

4. Failing to create a memory

Take $3,000, deposit it in your checking account, and then gradually use it in dribs and drabs. When it’s over, what do you have? Nothing. If you’re determined to blow your tax refund, at least buy a memory with it. Go to Paris or check out Asia. Do anything except letting your windfall slowly blow away.

5. Loaning it to someone

If you’ve been bragging about the giant check you’ve got coming, you have only yourself to blame: Now your friends, relatives or kids are looking for a loan. Before it’s too late, start telling everyone you made a math error and rather than getting $3,000 back, you actually owe $3,000.

6. Not doing something to improve yourself

Maybe it’s time to take that class that will prepare you for a better job, or get that computer or software that might help you make some money on the side, or even a new suit that might get you noticed at work. There’s something you can do that will pay dividends. Now’s the time to do it.

7. Using it to create more debt

Using your tax refund as a down payment on a car or other type of loan — especially the kind used to purchase a depreciating asset — should top the list of dumb things to do, especially if it’s unnecessary. Pay cash for a used car, then go on a cruise.

8. Failing to prevent future big refunds

I know it feels good to get checks in the mail, but big tax refunds are really more defeat than victory. Money you get as a refund is money you’ve lent interest-free to Uncle Sam all year. If you’re consistently over-withholding, visit the IRS W-4 calculator and see if you should adjust your W-4 at work so you’ll have less withheld from each paycheck throughout the year.

On the other hand, if you’re more capable of doing something productive with an annual lump sum versus a slightly larger monthly income, don’t change a thing.

9. Going to the mall

For some reason, when we get a check from Uncle Sam, some of us act like we won the lottery. This isn’t “found money.” It’s your money. If you didn’t need new clothes before you got your refund, you probably don’t need any now either.

10. Using it to sustain an unsustainable lifestyle

If you’re one of the millions of Americans who pay to get a refund anticipation check or submit to a high-interest refund loan because you need money instantly, it’s a sign you’re in over your head. Resolve to never again pay fees or interest to get your own money, then do what you can to make this craziness unnecessary.

4 smart uses for a tax refund

1. Create an emergency fund

Living paycheck to paycheck often means there’s never enough to get ahead. Use your refund to build a financial cushion, ideally enough to cover at least three months of living expenses. Then bills always get paid on time, which saves late fees. You never need a cash advance, saving fees and high interest. You can stock up on bargains at the grocery store. And the peace of mind? Priceless.

And if you already have an emergency fund, set the money aside for something you know you’ll have to replace eventually, like your car.

2. Save on insurance

Speaking of vehicles, many car insurance companies offer a discount if you pay the six- or 12-month premium in full. Use a chunk of your refund to do that, and put the rest in a savings account so you can raise your deductible – a simple way to save 10 to 20 percent on your premium.

3. Start a business

Use your refund as seed money for a side business, or classes in a skill you’ve always wanted to learn. You could launch a website, sell your own arts and crafts, or start a garden and sell your extra fruits and veggies at a farmers market. Boosting your skills might be good leverage for a raise.

4. Save for retirement or college

You could start funding a 529 college savings plan for your kids or an IRA or other retirement account for yourself. This not only plants money to harvest at a future date, it could also earn you a deduction on next year’s taxes.

It’s moves like these that make the momentarily rich permanently richer.

Where’s my refund?

If all this sage advice has you chomping at the bit, you can check on your refund by going to the Where’s My Refund page of the IRS website or by calling the IRS Refund Hotline at (800) 829–1954. If you mailed your return, wait at least three weeks before checking. If you filed electronically, allow 72 hours.

If you use the automated telephone system, you’ll need your Social Security number, filing status, and the amount of the refund shown on your return.

What are you planning to do with your tax refund this year? Tell us below or on our Facebook page!

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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