8 Things You Can Do With Your Tax Refund

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Many people will be receiving (or have already received) a tax refund in the near future. Most people that I know plan to blow it on something that will not provide a benefit for their lives. Instead of wasting your refund and regretting your decision, try one of these 8 tips!

Tax Refund

What To Do With Your Tax Refund

Start An Emergency Fund

Probably the most common characteristic of a financially stable household (besides the idea of living within their means) is an emergency fund. The point of this emergency fund so you can have money stashed away when something unexpected comes up.

If you are not financially prepared for emergencies, then you may be forced to rely on high-interest credit cards, or tap into your retirement savings in order to get by.

Pay Down Debt

Another great use of your tax refund is to pay off debt. This may seem like a boring option (especially when compared to how most people use their tax refund), but it will automatically earn a rate of return that is equal to the interest rate on your debt.

For instance, if you pay off a credit card that had an interest rate of 20%, then that is equivalent to earning 20% on an investment!

If you use it to pay off/down an installment loan (such as a mortgage or car loan), then you may have to specify that your extra payment should be applied to the principal.

Consider Paying Infrequent Expenses

Many times it can be difficult to remember those expenses which only come once or twice each year. Instead of being taken by surprise and sent scrambling for extra cash at the last minute, either pay or put aside money for these expenses using your tax refund.

Some of these can include your car insurance premium, a maintenance fee on a timeshare (don’t get me started on this one) or other property, roadside assistance fee, and any other types of subscriptions.

Save For Retirement

You can easily fund a retirement account, such as an IRA with your tax refund. If you have more than the current IRA contribution limits, then you can fully fund your account while taking advantage of one of these other options.

If for some reason you are not reaching the 401k contribution limits at work, you can use this extra money as a way to increase what you currently contribute. Of course, you can’t add outside money into a 401k; however, if you fall short of the contribution limit due to other expenses, you can use your tax refund to pay those other expenses and increase the amount that goes into your 401k!

Save For A Large Purchase

If you are looking to purchase a car (learn how to save money on car costs), new laptop, vacation, or any other large purchase, this may be your chance. Instead of going into debt to buy the item, you can use your tax refund.

Even if the amount of your refund isn’t enough for you to purchase the item outright, it can greatly reduce the time it will take to save up for it. You can also pad the account with bonuses, raises, and future tax refunds.

Give

Giving is a very important part of any financial plan – especially for a Christian (we are commanded to give). I know many people who have a strong desire to give, but are not able because things are too tight for them financially.

If you are in a situation like this, a large tax refund can provide you with the perfect opportunity to give. There are plenty of organizations that are looking for donations in order to fulfill their mission such as, your local church, a missionary, food banks and homeless shelters, and any other charity that is fighting for a worthy (to you) cause, and has proven to be reliable!

 

Start A “Blessing Fund”

One of the things that my wife and I want to do (once we are out of debt) is to establish a savings account that will only be for the purpose of providing financial blessings to others. By having a separate account for this, we never have to worry about depleting our emergency fund or any other “dedicated” savings when we come across someone in need.

If you have a desire to help people out at various times, but don’t always have the means when these times come up, use your tax refund to start a “blessing fund”.

Spend Your Tax Refund

I’ve talked before about celebrating small victories during your financial journey.  Use some or all of your tax refund and do something that you have wanted to do, but couldn’t. Maybe go out to a fancy restaurant, or buy a New iPad or some clothes!

No matter what you choose to buy, use all or a part of your tax refund to treat yourself. Then take the rest and put it toward your highest financial priority. This way, you can celebrate achieving a financial milestone, without diverting funds away from your current plan.

Reader Questions

  1. Did you receive a tax refund this year? If so, how did you spend/save it?
  2. Do you purposely have excess taxes withheld during the year so you can have a large refund?
  3. Do you regret how you’ve spent a previous tax refund, bonus, or other “windfall”?

Three Important Services of an Asset Management Firm

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A successful man or woman gets to the point where they realize they do not have the time to manage their investments, but without asset management, a lot of hard work can disappear due to losses on your investments.

If you have reached the point in your career where you have this problem, you need to hire the services of a wealth management firm. You may already have some assistance with your investments, such as those found with a stock broker or an investment firm, but wealth management goes far beyond picking stocks.

Pile of Money

Three Important Services of an Asset Management Firm

A Comprehensive Approach To Wealth Management

A wealth management firm will look at the portfolio of your total assets and not just your investments in stocks. Equally important, is that a comprehensive approach includes taxes as well as return on investments. When investing, there are always tax implications that go far beyond income taxes. You can easily calculate your income tax if you sell an asset, but there are many ways to reduce your taxes on the sale of an asset.

There are also smart ways to invest your money that incorporate tax credits and deductions into the equation for a maximum return on investment. Combining tax knowledge and investment skills open up areas of wealth management that goes far beyond what you can do yourself or what a typical investment broker for stocks and bonds can do.

Municipal Bonds

These are tax-free bonds, but they are not without risk. When purchased with knowledge, experience and good research, they represent an outstanding investment. It is often tempting to simply look at the tax-free aspect of these bonds and attempt to buy them yourself, but without buying the right bonds, the tax-free element may not be worth the effort.

You need a wealth management firm to select the right municipalities to invest in, because in today’s economic environment, cities can go bankrupt. Along with the security of the bond, you want to also maximize your return. Combining an interest rate, with the tax advantages is best done by those who understand bond investments and also have the skills of a tax accountant.

Personalized Service

Because all of your assets are being managed, wealth management becomes personalized. Not only is there a strong interest in what you want to achieve financially, but your total portfolio of assets will be designed to reflect your personality and preferences. If there are certain types of assets you do not want to purchase, for whatever reason, these assets will not become a part of your portfolio.

With a wealth management firm, your asset portfolio will reflect who you are, not only as an investor, but as an individual. Common investment brokers do not approach this level of personalized service.

Wealth management is something that will benefit you and your loved ones for the rest of your life, and with the proper estate planning, a wealth management firm will benefit your loved ones long after you have passed away. Selecting a wealth management firm is not something that should be done quickly or without contemplation.

This type of firm must have the experience and skills to take a comprehensive approach to your entire asset portfolio. There are several firms that have these characteristics.

Roth Vs Traditional IRA: Which One Is Best For You?

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When the idea of saving for retirement comes up, many people wonder whether a Roth vs Traditional IRA is better for them. There are many similarities between these two investment vehicles, but there are also enough differences to make this question a little more difficult than it seems.

We will look at some of the similarities and differences of these Individual Retirement Arrangements

Roth Vs Traditional IRA

Both a Roth and Traditional IRAs can be great options when it comes to saving money for retirement and a viable alternative to private or stakeholder pension plans. Before we take a look at Roth IRAs, let’s look at a couple of quick points regarding traditional IRAs, so you can better decide which may be the best retirement plan for you.

Traditional IRAs

One of the greatest benefits of a Traditional IRA is the fact that your contributions can grow freely, with the taxes that you owe being deferred until the money is distributed. This means that you receive the benefit of compound interest on all of our contributions, gains, and other earnings!

In most cases, the contributions that you make into a traditional IRA are fully or partially deductible – depending on your circumstances. That means that your taxable income is reduced by the amount that you contribute to a traditional IRA (if it is fully deductible).

An IRA usually provides more freedom than an employee sponsored retirement account when it comes to your investment options. You can invest in individual stocks, bonds, mutual funds, CDs, and even real estate! This helps to make an IRA an extremely attractive retirement vehicle.

Here is something that is usually seen as a negative feature of a traditional IRA. According to the IRS:

You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½.

That’s right – if you do not start withdrawing money from your account, the IRS will charge a 50% tax on the amount that should have been distributed! Before you become too outraged, remember that you received a tax deduction on your contributions, and you are not required to pay taxes on any gains until they are distributed. If you kept the money in your account indefinitely, it would never get taxed…there is no way that Uncle Sam will allow that!

You can read IRS Publication 590 (link to online version) in order to gain more information about Traditional IRAs, including calculating the required minimum distribution.

Roth IRAs

In looking at the “battle” of Roth vs traditional IRAs, there is no need to compare the investment opportunities since they are exactly the same. Unlike their counterparts, Roth IRAs do not give you a tax deduction upfront. This means that you will have to reach the IRA contribution limits with without the benefit of reducing your taxable income for the year.

Like the traditional IRA, your contributions, gains, and earnings will grow without being taxed – allowing compound interest to kick in! However, since your initial contributions were made with taxed dollars, you do not have to pay taxes when you take a qualified distribution from the account!!!

What this means is once you put money into a Roth IRA, you will never have to worry about paying taxes on that money (as long as you satisfy the requirements). For one thing, you have to keep your contributions in the account for at least five years before you can withdraw them with no penalty. Of course, since it is a retirement account, keeping the money invested for more than five years shouldn’t be a problem.

Another thing to consider with Roth IRAs is that you can make contributions to the account even after you turn 70 1/2 (something which you cannot do with a traditional account). On top of this, you are also able to leave amounts in your ROTH IRA for as long as you live. There are no required minimum distributions, and no taxes assessed for failing to make withdrawals – since the initial contributions were already taxed.

Roth Vs Traditional IRA – What’s Best For You?

Here is one of the keys to consider when trying to answer this question:

At what stage in your life will you be paying lower taxes? If now, then go with a Roth and pay lower taxes on your contributions, rather than paying taxes on your distributions when you are paying at a higher rate. If your lower taxes will come in retirement, then go with a Traditional IRA to get the tax break when your taxes are higher, and pay taxes on your contributions once you are in a lower bracket.

There are a couple of things that will affect your tax rate both now and in retirement.

  • The tax code – will future administrations raise taxes in order to pay for government spending?
  • Your income – will you have more taxable income now or in retirement? The answer isn’t as obvious as it might seem.
  • The amount in your retirement accounts – if you have a take several required distributions from large accounts, that can easily push you into a higher tax bracket.

There are other things to consider but since they are pretty much impossible to quantify, we will leave them for another discussion.

Photo Source: goodfinancialcents.com via Jeff on Pinterest

Reader Questions

  1. Based on your situation, which IRA is best for you?
  2. What do you think about having one of each?
  3. At what point did you/will you start saving for retirement?

This post is a part of the Roth IRA Movement that my blogging buddy Jeff Rose at Good Financial Cents put together. The last time I checked, there are almost 150 websites that will be posting about the benefits of Roth IRAs! Even though the information is pretty standard, I am confident that each post will be different, because of the voice of the individual writing it! You can read my other post (which takes a more personal and informal look at this question) on my weight loss and debt repayment site here: Why Roth IRA is better than Traditional for us

Need More Time to File Your Tax Return? Here Is How To File For An Extension

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For many people, meeting the IRS’s April 18th tax return deadline for filing and paying the 2010 taxes will prove impossible. Unfortunately, the IRS did not automatically extend the deadline because of the tax filing delay!

Fortunately, the IRS allows taxpayers to file for an extension of the deadline to October 17th. The process for requesting an extension is fairly easy, however, there are a few things that you must consider regarding this option.

What Happens When You File For An Extension?

Filing for an extension gives you an additional six months to submit your tax return. For tax year 2010, that means that your tax filing deadline would be extended from April 18, 2011 to October 17, 2011.

An extension allows you to submit your tax return after April 18th, but it does not extend the amount of time you have to make a payment. This means that you will owe interest on any amount not paid by the original April 18th deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date. In order to avoid all interest and penalties, you must pay the full amount due by April 18th.

How To File For An Extension On Your Tax Return

In order to request an extension, you must file Form 4868 (PDF) with the IRS before April 18th. You can electronically submit Form 4868 through IRS Free File. Using this service to prepare and electronically submit Form 4868 is free to everyone, regardless of income.

Actually, since I offer professional tax preparation services, I can also electronically submit Form 4868 for you – just use the contact form on the linked page.

What If You Can’t Pay Your Taxes By The Deadline?

Since extending your filing deadline doesn’t push back the deadline for payment, what can you do if you can’t pay the full balance by April 18th? Here is what the IRS recommends:

If your return is completed but you are unable to pay the full amount of tax due, do not request to extend your filing deadline. Submit your tax return on time and pay as much as you can. The IRS will send you a bill or notice for the balance due. To apply online for a payment agreement, go to IRS.gov and click “Online Payment Agreement Application” at the left side of the home page under Online Services. If you are unable to make payments, call the IRS at 800-829-1040 to discuss your options.

If I Still Have To Pay By April 18th, What Is The Benefit Of Filing For An Extension?

By filing to extend your deadline, you are able to avoid the failure-to-file penalty. This penalty is usually larger than the failure-to-pay penalty, so by filing to extend your deadline, you are able to avoid paying the larger penalty.

Also, if you are able to pay at least 90% of your tax liability (remember that for a large amount of taxpayers, your withholdings may cover this amount already) by April 18th, and request to extend the deadline, you will be able to avoid paying penalties, as the IRS explains:

  • The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
  • You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
  • If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty if  you file by the extended due date and pay the remaining balance with your return.
  • You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

So the bottom line is that if you have already completed your return and you know that you can’t pay the entire balance, it is better to just submit your tax return, pay what you can, and set up a payment plan with the IRS.

You should only request to extend your deadline if you are unable to complete your tax return by April 18th!

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The IRS Has Over $1.1 Billion In Unclaimed Refunds

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The IRS has more than $1.1 Billion in unclaimed refunds for nearly 1.1 million people who did not file an income tax return for 2007. Many taxpayers may have chosen not to file a return because they did not earn enough income to require filing an income tax return, even though they had taxes withheld from their income. There are many reasons for you to file a return even when you are not required to do so.

How To Get Your Unclaimed Refunds

In order to recover your unclaimed tax refunds, you must file a return for tax year 2007. Taxpayers are given 3 years from the due date of a return in order to file – there are no late-filing penalties charged when a refund is due. Since the tax return deadline has been extended, you have until April 18, 2011 to file your 2007 return.

You may not feel like going through the trouble of filing an old return for a couple of dollars (I probably wouldn’t either), but…

The IRS estimates that half of these potential 2007 refunds are $640 or more.

If you fail to file a 2007 return by the deadline listed above, the money becomes property of the U.S. Treasury. Here is another lost benefit that you need to consider:

By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2007. In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2007 were $39,783 for those with two or more children, $35,241 for people with one child, and $14,590 for those with no children.

There are a few things that you must know when filing a return for tax year 2007:

  • You will not be able to file an electronic return, although you will be able to request direct deposit
  • If you did not file a tax return for 2008 or 2009, your 2007 return will not be released to you
  • Your 2007 refund will be used to satisfy any outstanding debts owed to the IRS, unpaid child support, and any delinquent federal student loans

    • To be honest, if you any of the outstanding debt mentioned above, collecting an unclaimed refund from 3 years ago would be a great way to pay it off! This way, you don’t have to worry about taking out any unsecured loans! If you don’t have any of the above, then take a look at the IRA contribution limits and prepare yourself for retirement!

    Here is some final guidance that the IRS issued in order to make this process as easy as possible:

    Current and prior year Internal Revenue Service tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 1-800-TAX-FORM (1-800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2007, 2008 or 2009 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by ordering on-line, calling 1-800-908-9946, or by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS.

    It may be helpful to look at your last year tax return as well.

    Hopefully, a few of the 1.1 million people who are due money will read this before the deadline – be sure to share this article with everyone that you know before then 😉 !

    photo by Salvatore Vuono

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