Will you receive a big tax refund from Uncle Sam? The answer depends on your withholding.
On your Form W-4, you may make allowances for yourself, your spouse and your dependents. For every allowance you take, less money gets withheld for federal taxes and more money gets added to your paycheck. For those of you who want—or need—the extra cushion each month, this is a smart move. However, if you’re more likely to save or invest your tax refund than you are to save or invest a portion of your paycheck, receiving a tax refund may be a great strategy.
To ensure you withhold just the right amount, use the IRS Withholding Calculator and submit a new W-4 to your employer if needed.
6 Money-Smart Uses for Your Tax Refund
If you are expecting a refund this tax season, consider these six tips for using it wisely:
Pay down credit card debt. First, attack the card with the highest interest rate. If you can pay off the card in full, that is even better.
Build up an emergency fund. Tuck some of that tax refund into savings. Even a modest amount—as little as $500—can help soften the blow of the typical unexpected expenses. If you already have an emergency fund, give yourself an extra boost toward reaching that three-to-six-month-living-expenses recommendation. If you have yet to establish a plan, learn how to maximize your savings and save for multiple goals.
Invest in a retirement plan. Enhance your future now by using your tax refund to invest in a tax-deferred retirement plan. If you have an Individual Retirement Account (IRA), make a one-time, sizable contribution, or save your refund for a series of smaller investments over several months. If you don’t have a retirement account, learn more about them here.
Prepay your mortgage or loans. For homeowners with hefty monthly mortgage payments, give yourself some breathing room by using your tax refund to pay ahead. For nonhomeowners, contribute to your car loan or student loan, or prepay on your insurance premium.
Be good to your car and your home. Use your tax refund to help fund costly, but necessary, repairs to your home or vehicle. Replace that leaky roof or buy new tires for your car.
Treat yourself. If you’ve covered all of the above, then reward yourself—but do so responsibly. Use your tax refund to fund a well-deserved vacation or buy yourself that flat-screen TV or mp3 player you’ve been eyeing. Just be sure to maintain your fiscally savvy ways by finding the best deal, and click here for tips on making a major purchase.