Best ways to spend your tax refund: Spend small, save big

Waiting by the mailbox for your 2011 tax refund? Or maybe you’ve already received it and are trying to decide what to do with it. Last year, the average tax refund was just over $3,000.

Although it might be tempting to dash out and buy a brand new, shiny something or other, curb that impulse for a minute and ponder your options.

It’s OK to give yourself a little treat. But remember, the IRS isn’t sending you that money just because you’re cute. That’s your hard-earned money, so consider using it in ways that can potentially help you out down the road.

Top tips for your tax refund

• Pay down debt. If you have high-interest credit card debt, medical debt or car loans, consider using all or part of your refund to pay down your balance. Reducing high-interest debt whenever you can is always a good idea.

• Invest in your future. Studies show that 68 percent of Americans aren’t saving enough for their retirement. Don’t let that statistic be you. Use your refund to put more money into your Individual Retirement Account, your 401(k) or a mutual fund. You might even consider a savings account or certificates of deposit with the best rates you can find.

• Invest in your kids’ future. If your retirement fund is looking strong, consider investing a little extra in your child’s college savings plan this year.

• Create an emergency fund. Many people say they plan to start an emergency fund, but then they don’t do it. Now that you have the extra money in your hand, it’s time to take action. Experts recommend having six months’ worth of living expenses on hand for unforeseen circumstances. Get your fund started with your refund and then add money each month to tide you over in difficult times.

• Make an extra mortgage payment. If your goal is to pay down your mortgage, just one extra payment towards the principal amount could reduce the interest paid over the life of your mortgage by thousands of dollars.

• Refinance. Mortgage rates remain low. If you haven’t looked into refinancing yet, do some investigating to see if you’d benefit. You could save thousands over the life of your mortgage and your tax refund can help foot the bill if there are fees involved.

• Do what you’ve been putting off. Things like a non-life threatening medical procedures, dental work, braces for the kids or tires for the car may have all seemed like luxury items when you didn’t have ready cash. Now you do. Use it wisely.

A CPA can help

If you are continually receiving a large refund year after year, it’s probably time to take a look at your withholdings on your W-4 statement — the form you completed for your employer when you were hired so they withhold the correct amount of federal income tax from your pay. If your financial situation has changed, you need to change your withholdings.

The most important thing is to stop overpaying the government with your money, according to the Minnesota Society of CPAs (MNCPA). Ideally, at the end of the year, you don’t owe the government anything, and the government doesn’t owe you anything. You can use the money you save to increase your contribution to your 401(k) plan, for example.

But if you do receive a refund, give careful thought to how you use it. Allow yourself a small reward now, and then use the rest in such a way that you’ll receive a much larger reward in the future.

The Minnesota Society of Certified Public Accountants (MNCPA) serves the public interest by advancing the highest standards of ethics and practice within the CPA profession.

Tags: news, updates, money, tax