Smart Ways to Use Your Tax Refund

You did it. You pulled together your tax information prepared your return and received a refund check. In 2009, more than 110 million taxpayers received tax refunds that averaged $2,753 (2010 numbers are not yet available). If you were fortunate enough to get a refund this year, the New Jersey Society of Certified Public Accountants (NJSCPA) offers some advice on the best ways to use it:

Get Out of Debt
Lowering your outstanding high-interest debt should be one of your top priorities for a tax refund or any other cash windfall. Although you can get more immediate satisfaction from a vacation or other splurge, decreasing your outstanding debt balances will put more money in your pocket over the long-term. That’s because once you pay off your credit card or other consumer loans, you save yourself all of the interest you might have paid on those balances in the coming months and years, an amount that can build quickly. While it’s almost always a good idea to pay off high-interest consumer loans (such as credit cards), paying down other borrowings (such as a home mortgage) may or may not deserve to be a top priority.

Pump Up Your Reserves
Do you put some money each week or month into a savings account? Are you contributing to a retirement plan? If not, or if you’re not happy with the amounts you’ve put away, it may be a good idea to park your tax refund in a savings account or secure investment or add to or open a retirement account. Again, it may not be as much fun as a trip to the mall, but down the road you’ll be happy you built this foundation for the future.

Make Needed Repairs
If you are facing urgent home and/or auto repairs, this may be a great use of your refund. Keeping up with your home or car maintenance can save you money if it helps prevent more serious problems later.

Think Ahead
Will you or another family member be attending college in the fall? Do you usually have a lot of people on your holiday gift list? If you know that you have some big expenditures ahead of you — books, college supplies, expensive presents or holiday entertaining — it may be a good idea to earmark your tax refund for these outlays. You might even consider doing some seasonal gift buying now, which is a fun way to bring the holiday spirit into the hot summer months.

Have Some Fun
Although we’ve advised against a big splurge, it might actually be wise to spend part of your refund on a small indulgence, such as a weekend at a local bed and breakfast, instead of a week in the Caribbean, or a new appliance, instead of a kitchen renovation. You’re more likely to use your money wisely if you do allow yourself some rewards. So if you’re hankering for one affordable luxury, go ahead and indulge yourself. Just be sure that any spending you do fits your overall budget.

Consult Your Local CPA
If you received a tax refund this year, you might want to lower your withholding on your regular paycheck so that you get a little bit more money each week and receive a smaller refund (or none at all) next year. If you’re not sure whether this change is right for you, turn to your local CPA. He or she can offer valuable advice on taxes, paying off debt and other financial questions facing your family.

If you don’t have a CPA, you can easily locate one online using the NJSCPA’s free, online Find-A-CPA service. Just go to www.findacpa.org, and in a few clicks you can locate a highly qualified professional who can assist you.

July 1, 2010