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Minnesota Spokesman-Recorder

7 wise ways to spend your tax refund

MINNESOTA SPOKESMAN-RECORDER — This year’s tax season seems to be giving taxpayers one big headache.

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By Kay Robinson

This year’s tax season seems to be giving taxpayers one big headache. New tax guidelines coupled with the aftermath of the country’s longest-ever government shutdown has led to reduced refunds and even longer wait times.

According to the IRS, refunds are down nearly 17 percent, with the average refund dropping from $3,169 to $2,640 as of Feb. 15. That is a significant drop from 8.4 percent reported just a week prior. The drop is a huge indicator of how the new Tax Cuts and Jobs Act changes are affecting taxpayers who are expecting refunds. Now they are smaller or gone altogether (though an expected one-third will actually receive an increase.

While tax refunds may be down, 80 percent are still projected to receive a little something back from the government this year.

The best steps to mitigate any reductions you may receive this year are by filing early and plotting a game plan for how those dollars will be spent before you get them. That way you can make the most out of it, without it sitting in your bank, primed for an impulse buy or regrettable money decision.

Read on for seven ways to get the most out of your (reduced) refunds.

Start that emergency savings fund
Sure, you may have been talking about it for some time now, but haven’t quite gotten it together. If you’ve received a lump sum, put at least $400 away for an emergency/rainy day fund. But, if you can put more, do so.

Financial coach Jonathan Marcello of Marcello Solutions has previously advised that taxpayers put 50 percent of their refunds into savings.

“Let this be the catalyst to get you contributing to your own safety net,” he said. “This might be the biggest check you see all year, don’t let it go to waste.”

Tip: Look for a high-yield savings account to get a better return on your dollars.

Catch up on bills
This should be a no-brainer, but just in case, this is the time to pay down those looming heating and energy bills. Assess your bills for the year and see what you can get ahead on, especially one-time or infrequent bills like tabs or car insurance.

Pay down that high-interest credit card
Even if you can’t zero out the entire balance, paying down on your highest-interest credit card is a win-win situation. Not only will it reduce your long-term debt, but it will also help increase your credit score (opening the door to better credit card rates).

Make an extra (principal-only) mortgage payment
Another way to beat the interest blues is to make an extra payment on your mortgage. “This alone is one of the best financial decisions to make when it comes to spending your tax money,” said Marcello. “You can reduce the life of your loan by months and even years, by adding a couple of hundred dollars each month. An extra principal-only payment will be a significant boost.”

Just one extra mortgage payment a year can reduce the life of your loan by four years. Two extra payments can reduce it by up to 10 years. And, you’ll save tens of thousands of dollars in interest.

Invest in yourself
Before we even explore investing in any financial opportunities, look at investing in your career, education, and self-care. Use these monies to go back to school, get a new certification or even learn a new language to boost your professional career. You might even want to spend your windfall on that physical trainer who’s been out of budget or a mini health and wellness retreat to help you refocus and realign.

Max out your Roth IRA
Contribute to your retirement life by maxing out your Roth IRA contributions — up to $5,500 or up to your taxable income for 2018. Roth IRAs are flexible, easy to open in minutes and since funded with post-tax dollars, they grow tax-free (as long as you follow guidelines). You can also withdraw during hardships without penalties or additional taxes. And, when you retire, your money (and its earnings) will remain tax-free.

Splurge (a little bit)
Understandably, getting a huge chunk of cash that you can’t have any fun with can seem a little depressing. Instead of putting yourself on total financial restriction, take five or 10 percent of your return and do something fun and frivolous (within reason) for yourself. This could be going out on date night, buying a cool new gadget or adding a piece or two to your wardrobe.

Kay Robinson welcomes reader responses to [email protected].

This article originally appeared in the Minnesota Spokesman-Recorder. 

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