You’ve filed your income tax returns, got a refund, and now you’ve got a little money burning a hole in your pocket.
There are 1,000 wants calling to you, and perhaps a few smart ways to use your tax refund have crossed your mind.
It’s enough to make someone leap before they look.
Tax prep season is a great time to evaluate your personal finances and what could be done differently, especially when it comes to your income taxes. Ask yourself some tough questions, and you’ll be on track for a smoother tax return next year.
Did you get a big tax refund or did you owe?
If you got a big tax refund, it means that you’re paying too much in taxes. While you try to scrape by from paycheck to paycheck, Uncle Sam is using your money interest free. Adjust your tax withholding using the calculators on the IRS website, and keep the money in your bank account.
If you ended up having to pay in a large chunk of cash, you’ll need to adjust your tax withholding, too, so that you don’t run the risk of penalties or an audit.
The goal is to not owe the government money, and to get little, if any refund.
How did your tax prep go this year?
Did you do your taxes yourself? Did you hire a tax prep service or use a CPA? Now is a good time to reflect on your experiences. Make a note of what the tax preparation services cost so that you can build them into the budget for next year. If you want to try a new service or a new accountant, make a note of that, too. You can start researching firms and services early. You can also ask family and friends for their recommendations while their experiences are fresh in their memories.
How long did it take you to find all your papers?
The more prepared you are, the easier it is to figure out your tax return. And if you are paying someone by the hour to do your returns, you want to make their job as easy as possible. Get your paperwork in order so that you can streamline next year’s taxes.
What is next year going to look like?
Think ahead to what the future may bring. Will your income change dramatically? Will you add another child to your family? Getting married? Filing for a divorce? Sending a child to college? Think about how your financial situation may change because it can affect your tax liability. Consider meeting with a tax professional and a certified financial planner for advice on your specific situation. They may be able to suggest strategies that will help you reduce your tax bill for next year.
Why am I in a hurry to spend money?
If you find yourself pressured to spend your tax refund, stop and ask yourself why spending that money is so urgent? A sudden windfall (whether unexpected or not), is not a license to be foolish with money. Put the money in your savings account while you reflect on the best uses for it.