5 SMART Ideas For Your Tax Refund
By Jeffrey Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
The 2015 tax season is now in full swing. As you finish preparing your own return for this year, you may find that you have to cough up some extra cash TO Uncle Sam. On the other hand, maybe you were too generous with Uncle Sam last year, and he owes you a refund. If that’s the case and you’re like most people, you’ve probably already spent that check before it arrives in the mail. But before you go out and buy that new flat screen TV – or whatever it is you’ve earmarked your refund for – here are 5 ways you might consider using this year’s refund instead.
- Turn it Into an IRA/Roth IRA Contribution
It’s not uncommon for people to wait until the last minute to make their IRA and/or Roth IRA contributions. For instance, now, in early 2015, many people are first making their 2014 IRA/Roth IRA contributions (they can be made up through April 15, 2015). The reality though, is that the earlier in a year you make your IRA/Roth contribution, the better off you’ll be. One way to make that contribution early in the year is to fund it using your tax refund.
For 2015, the IRA/Roth IRA contribution limit is $5,500 ($6,500 if you’re 50 or older by the end of the year) and, assuming you qualify for a full IRA/Roth IRA contribution in the first place, you can have up to that amount directly deposited into your IRA as part of your refund. If your refund exceeds your applicable IRA/Roth IRA limit, you can use Form 8888 to send part of your refund to an IRA and the remainder to another account, like your checking account.
- Use it to Help Pay This Year’s Taxes
Hopefully you’ll make more money this year then you did last year. If that’s the case, your tax bill will likely increase too. If you want to make sure you don’t get stuck with a big tax bill come next April, one way to help do so is by using all or a portion of your tax refund for 2014 as an estimated tax payment for your 2015 taxes. To do so, simply indicate on line 77 of your Form 1040 how much of your refund you’d like applied to this year’s taxes.
- Pay Down Debt
One of the best things you can do with a tax refund is use it to pay down outstanding debt. For instance, you may have outstanding student loans, a mortgage or credit card debt. Of these, credit card debt is usually the worst and is typically the first type of debt you’d look to reduce with a tax refund. Not only does credit card debt generally carry a high interest rate (it’s not uncommon to have credit card debt with an interest rate of 15% or more) that eats away at your hard-earned dollars, but even worse, you generally get no tax benefit for it. Unlike mortgage interest, which can usually be claimed as an itemized deduction, or student loan interest, which may be deducted as an “above-the-line” deduction, personal debt – like credit card debt – is generally not deductible.
- Build an Emergency Reserve
Let’s face it, no one knows for certain what the future holds. A leaky roof, a burst pipe, an unanticipated medical expense... these things just happen from time to time and can become a real financial drain and burden. While you can’t prevent such things from occurring, you can be prepared for them if – and really when – they happen. One of the best ways to do so is by building up an emergency reserve fund and your tax refund is a great way to jump-start or beef-up such savings. Keep in mind that when building your emergency fund, you generally want the money to be safe and easily accessible.
- Give to Charity
Wouldn’t it be awesome if you could somehow use this year’s tax refund to lower next year’s tax bill? Well good news, you might be able to do just that! And you can help out some great causes in the process. Simply donate all or a portion of your tax refund to a charity. You can generally claim the amount you donate to charity as an itemized deduction (if you don’t itemize deductions, you generally would not receive a tax benefit). This can help lower your taxable income and lower your 2015 tax bill. Who knows... with any luck maybe you’ll see another refund next year!