Tax Day was on April 18 this year. Typically, the deadline for filing taxes is April 15 but that date fell on a Saturday this year, and since Monday, April 17 was Emancipation Day, Tax Day was pushed back to the 18th, giving late filers three extra days to finalize their taxes.
If you’re a dutiful and conscientious person, you probably filed your taxes early and have already received your refund. But if you filed just before the deadline, you won’t be receiving your refund for several weeks. If that’s the case, I thought it might be helpful to provide some options to consider what to do with your refund when it arrives.
Naturally, when a check arrives in the mail (or is deposited directly into your checking account), there is a temptation to splurge on something new and shiny, or to indulge in a long-held desire. Often people think of their tax refund as “found money” or as a “bonus” and therefore believe it can be frivolously or nonchalantly spent.
But it’s not found money; it’s your money that you handed over to the government throughout the year and now it’s being returned to you (without interest) in the form of a refund. Instead of buying a new car or taking an exotic vacation, I would urge you to consider using your refund in a more prudent manner, in a way that would have greater impact on your overall financial health.
The average refund for most Americans in 2016 was $3,050.00. That is not an insignificant amount of money. Therefore, I urge you to consider all the ways that you might use your refund in order to improve your financial standing.
Maybe you decide to pay off high-interest credit card debt? Or maybe you start a college education fund for your children? Maybe you use it for a down payment on a house, or make an additional contribution to your retirement accounts? Or maybe you just put the funds aside in a rainy-day emergency account?
The point is to adopt a perspective that recognizes how your refund can help you to achieve your longer-term financial goals, rather than indulging in more immediate and whimsical pursuits.
In addition to deciding what to do with your tax refund, the end of the tax year is also a good time to review your tax filing status and to make whatever changes are appropriate due to the current circumstances in your life.
First, let’s review why you got a refund at all. As a tax payer, you paid too much money to the government throughout the year and now, after filing your taxes, the government is returning to you the amount you overpaid.
Some people prefer this arrangement because they don’t have to send any money to the government at the end of the year when filing their taxes. However, if you’d like to reduce the amount of money that’s being taken from your paycheck, it can be done by adjusting the number of allowances on your W-4 form.
Also, if your personal circumstances have changed – if you recently got married or divorced, if you had a baby or bought a house – then you should make the appropriate changes to your W-4 form, which will affect the amount of money that is deducted from your paycheck throughout the year.
Finally, it is also a good time to review your tax planning practices to make sure you are receiving all the deductions to which you are entitled. Are you saving all your receipts for any charitable donations you might have made throughout the year? Did you overlook any deductions, such as the purchase of energy efficient appliances or other energy efficient improvements made to your home?
It is important to plan for and track these kinds of expenses so that you are taking all of your eligible deductions. Plus, it is a good idea to save all your receipts in the event of an IRS audit. In that case, it is far better to be safe than sorry.
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