Tax Returns and Spending: You Could Save $100s

Tax season is here! For some, that means writing a check to Uncle Sam. But for most people, that means a big refund check sent their way on April 15th. But what should you do with that refund check? How can you spend it wisely? Check out our favorite tips for tax returns today.

Evaluate your withholdings

First and foremost, if you are receiving a large text refund every year, you should check your withholdings to see if you can make some changes. The IRS has a Tax Withholding Calculator that is free to use, where you can see how much you should be withholding for your federal taxes each pay period. The end goal when filing your taxes should be to get to as close to zero as possible – no refund and no balance owed. As nice as it may be to have that “extra” large check every April, it’s not necessarily the best plan for the average budget. Why? Because it is essentially acting as a 0 interest savings account for you.

Instead of having the extra money in your biweekly paycheck, you are having the money withheld and refunded to you at the end of the year, without any interest earned. Imagine what could happen in your budget if you had an extra $150 per month. That’s huge!

Many advocates of the tax return argue, “I’m not good at saving. So my tax return helps me save for big purchases.” Let’s look a little closer at that.

Plan for it.

Instead of using the federal tax return as a no interest savings account, let’s say you set up a direct deposit from your paycheck. This would be an automatic transfer of $50 every paycheck directly to your savings account. Even better – you won’t even see it in your paycheck or realize you are missing anything. Most companies with direct deposit will allow you to select either a dollar amount or a percentage amount per paycheck. Instead of getting exactly $2600 back in a tax return, you get $2600 in your savings account, plus interest. Win-win.

Spend WISELY.

We also understand that no tax return might not work for everyone. That’s alright – if you really want a tax return each year, fine. What’s most important is that your tax return is NOT extra money. It is not a “free gift” from the government each April, to spend as you choose. It is YOUR hard earned money. A tax return is a refund on an overpayment, so by design it is a refund of what was already yours. So if you are going to hold fast to your tax return, don’t blow it! It is your money, rightfully earned. Save it, apply it towards your debt, or make an extra payment on your mortgage. Don’t use it to buy the newest gaming system or other entertainment devices. If you wouldn’t normally buy it, done use your tax return for it.