Tax Hacks 2015: How To Use A Tax Refund To Change Your Life

Whoo hoo! Ready for a nice, fat refund check from Uncle Sam? Taxpayers received, on average, $2,696 in refund money last year, the Treasury Inspector General for Tax Administration reports.

All too often that extra money makes people splurge, even while they imagine they’re saving it. How do you make sure this year’s windfall makes your life better long term?

Put it in your paycheck

First, remember that your refund isn’t a gift. You earned it but chose to bank with the Treasury Department instead of taking it in your paychecks.

This year, wouldn’t an extra $225 a month make your life a bit saner? If so, do this:

  • Gather your pay stubs and last year’s income tax return.
  • Use the IRS withholding calculator to learn if you should change the tax amount withheld from your paychecks. Read the instructions carefully to see if adjusting is a good idea for you.
  • Fill out IRS Form W-4, adjusting your withholding amount.
  • Bring the completed form to your employer’s payroll department.

Now for nine ways to make life better with that refund money:

Idea No. 1: Pay down high-interest debt

High interest rates can lead to devastating debt. Eventually you can end up with payments so large that it becomes difficult to do more than pay the minimum required each month. That’s a losing proposition, Stacy Johnson says:

Suppose you’ve got a $10,000 credit card debt and pay 15 percent interest. If you pay $250/month, you’ll pay the card off in five years and pay about $4,000 in interest. But lower the interest to 10 percent, and the same $250 will pay the card off in only four years, with an interest tab of $2,215. The lower rate saves you nearly $2,000 and a year of debt.

Here’s the most rational thing to do with a windfall: Use it to pay down, or pay off, your debts that have the highest interest rates.

Think of this way: Paying off a debt with a 15 percent interest rate is like earning 15 percent, risk-free and tax-free. That is virtually impossible to find these days.

When you’ve paid down your debt, don’t stop. Your goal should always be to improve your life. Charging and borrowing leads you in the opposite direction. If credit-card debt, payday loans or other high-rate debts have been a problem for you, use this moment to escape the cycle. Choose from the trustworthy sources of free credit counseling and get help so your 2014 refund improves your life permanently.

Idea No. 2: Pay off small debts

Paying off high-rate debt first makes sense, but it may not work for you. Some people get more motivation from demolishing smaller debts first.

U.S. News and World Report explains why this strategy can make good financial sense: “[I]f you can focus enough to pay off your debts in a relatively short amount of time, the higher interest rates on other accounts may not add up to much extra money.” We’ve said the same in posts like “The Best Way to Pay Off Debt.”

Of course be careful here, too, not to run up new debt and dig yourself back into the same hole.

Idea No. 3: Fatten your emergency fund

You are debt-free? Bravo! In that case, strengthening your financial safety net may be the next best use of a tax refund.

Opinions differ on how much to save for emergencies. Many experts advise keeping enough money to cover your expenses for six months. But maybe the question is: If you lost your job, how long could you expect to be unemployed?

The length of time people are unemployed typically depends on what the economy is like when they lose their jobs.

That’s obvious, I suppose, but it tells you the goal for your emergency fund may vary: smaller in fat times, larger in lean ones. The size of your fund also may vary depending on how hard it is to find work in your field, or how stable your current job is. And your savings should be greater if you’re older because it often takes older workers longer to find work.

AARP’s 2014 analysis of data from the Bureau of Labor Statistics on the average length of unemployment for workers found the following:

  • Age 54 and younger: 34.7 weeks to find a job (almost nine months).
  • Age 55 and older: 45.6 weeks (nearly a year).

I know someone who lived on savings for a couple of years while hunting for work during the recession. He’d set aside a big bonus so he did OK, but the experience made such an impression that he now tries to keep a year’s worth of savings for an emergency.

Idea No. 4: Save for retirement

Retirement savers are a lot like professional football players, says Money Talks News writer Maryalene LaPonsie. They keep their eye on the clock, for instance. And they accept that you can make progress a few yards at a time. Read her six tips from the gridiron for retirement savers.

Idea No. 5: Save for college

Whether it’s your education or that of your kids, apply your refund check to a college savings plan or 529 plan that offers tax benefits in addition to saving for college.

Idea No. 6: Invest in your productivity

Leverage your refund to grow your earnings:

  1. Get more education. Sign up for a workshop or course or go to a conference or webinar, whether to upgrade your skills or try out a new field.
  2. Subscribe. Sign up for professional publications, newspapers such as the Wall Street Journal and New York Times, or cable TV or satellite radio channels that help your work acumen. Buy software you need to get ahead. Buy a premium LinkedIn subscription to network or find work.
  3. Invest in the right clothes. Get a tasteful, understated but impressive outfit for work or job interviews, one that makes you feel like a million bucks. Include good shoes.
  4. Buy the equipment you need. Get the new laptop, tool or piece of electronic equipment you need to move ahead in your field.
  5. Get therapy. Career advancement isn’t only about the right tools, skills and credentials. A chip on your shoulder, depression, anxiety, a fear of success or problems at home can prevent you from reaching your earning potential.

Idea No. 7: Hire a career coach

Career coaching can help you learn your strengths, identify where you could use help, set goals and strategize. There are many ways coaching can help further your career.

“Some people want to be coached through their job search, but others want help with their current work performance,” Hallie Crawford, certified career coach and founder of the Atlanta-based company Create Your Career Path, tells U.S. News.

The PBS website Next Avenue says:

After an initial free consultation, most coaches charge hourly fees, ranging from $50 to $500 (the priciest tend to be coaching sessions with executives). The average cost is $161 an hour, according to the International Coach Federation.

Idea No. 8: Contribute to charity

Do good for others while helping yourself earn a healthy tax deduction on your 2015 taxes by supporting a charitable cause. Make sure to get a receipt for your contribution, and be sure the organization you support is a legitimate 501(c)(3) charity, defined here by the IRS.

Idea No. 9: Start a business

Make your money your grubstake. Start the business you’ve been dreaming of, whether consulting, opening a coffee cart or retail outlet, selling your crafts, or patenting an invention.

Bonus: Four idiotic ways to blow your refund

Because tax refunds inspire some of the dumbest splurging possible, we feel duty bound to warn you against:

  1. Frittering it away. Won’t you feel like a dope if your money’s gone and you can’t say where it went? If you must spend it on consumption, use it for something memorable — maybe an experience with family or friends that you’ll remember forever.
  2. Going on a spree at the mall. Impulse buys are like drinking too much: You feel icky in the morning. When spending your refund check, aim for something that gives a feeling of increased safety and security.
  3. Creating more debt. Don’t use that refund as a down payment on a car that puts you deeper in debt. Put that money instead in a bank account dedicated to saving enough to pay cash for a used car.
  4. Letting it gather moss. There’s no standing still with money. Either it’s growing in value or inflation (even the modest inflation today) is eating it away. Here’s Stacy’s guidance on investing in mutual funds.

Let’s hear it: What will you (really) do with your tax refund this year? Post your comments below or at Money Talks News’ Facebook page.

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

Read Next
10 Tools You Need for Financial Stability
10 Tools You Need for Financial Stability

Have these tools and accounts in place so you can weather whatever comes your way.

This Is the Best Age to Buy Long-Term Care Insurance
This Is the Best Age to Buy Long-Term Care Insurance

If you wait too long to apply for coverage, you could be denied. So, when’s the sweet spot to apply?

6 Reasons I Will Never Trust Suze Orman
6 Reasons I Will Never Trust Suze Orman

Beware: The self-proclaimed personal finance expert has a track record that suggests more sizzle than steak.

Half of All Retirees Say They Fear This
Half of All Retirees Say They Fear This

Chances are good that you share this fear. Here’s a way to overcome it.

9 Ways to Boost Your Home’s Curb Appeal for Less Than $50
9 Ways to Boost Your Home’s Curb Appeal for Less Than $50

These products will instantly improve your home’s curb appeal without breaking the bank.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Whether you resell it for a big profit or add it to your own wardrobe, this type of clothing is a hidden steal.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

Does Wearing 2 Masks Protect You Better From COVID-19?
Does Wearing 2 Masks Protect You Better From COVID-19?

A growing number of people are wearing two masks instead of just one. Should you join them?

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

Taking a Multivitamin? Here’s Why You Should Reconsider
Taking a Multivitamin? Here’s Why You Should Reconsider

A new study has bad news for the millions of Americans who spend money on multivitamins.

21 Items to Cut From Your Budget That You Won’t Even Miss
21 Items to Cut From Your Budget That You Won’t Even Miss

Start off the new year by implementing these small-but-smart savings strategies. They’ll soon add up.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

These 10 Postal Price Hikes Start Next Week
These 10 Postal Price Hikes Start Next Week

Starting on Jan. 24, the price of various mail and shipping services will rise.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

10 Cars You Are Most Likely to Keep for 15 Years
10 Cars You Are Most Likely to Keep for 15 Years

The cars that owners hold onto the longest have one thing in common, a new study shows.

Prepare to Pay More for These 31 Drugs in 2021
Prepare to Pay More for These 31 Drugs in 2021

More than 700 prescription medications have seen price hikes so far this year. Here’s a look at the worst.

The 10 Golden Rules of Becoming a Millionaire
The 10 Golden Rules of Becoming a Millionaire

I’m a millionaire several times over. I got here the same way you can — by following these simple steps.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.