Spring is right around the corner, and you know what that means—it’s time to file your taxes! While you’re getting organized and gathering all your documents, don’t forget to pause and make a plan for any tax refund you might receive. It may be tempting to splurge on a big purchase or simply deposit the cash into your checking account, but we have some ideas for putting your tax refund to really good use and boosting your financial security in the year ahead.
- Save for a rainy day. According to a recent Bankrate survey, only 41% of Americans would be able to cover an unexpected $1,000 emergency expense, like a hospital visit or an unplanned car repair. It’s critical to have your rainy day fund set aside, and ideally, you should have three-to-six months of living expenses saved up, just in case of a financial hardship.
- Pay off existing debt. With emergency funds in your back pocket, it’s important to continue paying off debt, like credit card bills and student loans. Chip away at loans with high interest rates or try to eliminate smaller debt first. You can also make an extra payment on your mortgage or student loans to save money on interest and reduce the term of your loan.
- Prepare for a sunny future. It’s not too early to start planning and saving for retirement, your child’s education, and healthcare costs. When you put your tax refund into an IRA, or use it for your regular expenses so you can increase your 401(k) contribution, you’re investing in your future. A tax-advantaged 529 education savings plan will help cover costs when your child reaches college. Tax-free dollars can be invested into a Health Savings Account (HSA) to help you save for future health and medical expenses. The tax-free contribution limits for 2020 are $3,550 for individuals and $7,100 for family coverage.
- Invest in your home. It may be a smart idea to put your tax refund towards home improvements that can increase the value of your home. Ideas include upgrading to energy-efficient appliances that are more cost-effective, especially if they qualify for tax credits. You may also have larger renovations in mind, and depending on your financial situation, a home equity line of credit (HELOC) could be a helpful solution for you.
According to the American Bankers Association, lower-income workers are also encouraged to file a tax return—even if their income is too low to trigger any federal tax liability. That way, they can potentially claim the Earned Income Tax Credit (EITC). Depending on income, marital status, and number of children, the EITC can result in a refund of up to $6,557.
Regardless of your unique financial situation, develop a tax refund strategy so you use any extra cash wisely and efficiently this year. If you have questions or would like to learn more, please visit your local banking center or call us at 800-860-8821. We’re here to help you stay on the right path to financial health, no matter where you are on your journey. And as always, please consult your tax advisor.