From where we sit, getting a tax refund is a sin. But we all sin a little, right? And most don’t know that paying the U.S. Government more than you should in taxes is on the wrong side of the moral compass. “Wait,” you say, “I thought giving was good.”
In this case, “overgiving” is not good. You’re essentially spotting Uncle Sam an interest-free loan. But that’s why we’re here to help!
If you’ve already overcommitted this past year, we’ve got at least 5 solid tips for what to do with that extra cheddar.
But, first the public service announcement …
1. More than $500 on your tax refund? Take a look at your W-4
Your W-4 is a form your HR department handed you when you were hired. You might recall it being this weird questionnaire that computes how much money should be withheld in your payroll taxes. I’ve known people who just phone a friend to get the number of allowances: “Johnny does 7, so that sounds good to me.”
There are many online calculators available that make more sense than the actual form:
- Kiplinger: http://www.kiplinger.com/tool/taxes/T055-S001-tax-withholding-calculator-kiplinger/
- TurboTax: https://turbotax.intuit.com/tax-tools/calculators/w4/
- If you don’t trust any of the above and want to essentially walk through the form: https://www.irs.gov/individuals/irs-withholding-calculator
Use them. Get your number and then call your HR department to compare what they have on file. If it’s different, change the allowances you’re claiming.
One of our founders, Kevin Conard, likes to use this opportunity to encourage people to increase the amount they’re saving into their 401k. If you’re increasing the allowances you may not notice a difference in your paycheck. Solid plan.
2. Build Your Safety Net
A lot of the other tax refund tip lists have pay off debt listed first. Not going to argue exactly (I’d be contradicting some of my previous tips). But I will pitch an alternative point of view by focusing on your emergency fund with this particular “windfall.”
In my experience, psychologically, building an emergency fund can be a hard tip to grasp. Bad things happen to other people, right? Thus, no emergency fund. Then where do they go – their credit cards. See the vicious circle?
Take your tax refund and either 1.) contribute to your existing emergency fund (Go you!), or 2.) open a savings account to establish that safety net. I typically recommend an online savings account because of the likely preferential interest rates and convenience.
3. Get Rid of the Bad Mojo, i.e. DEBT
Already have a relatively robust emergency fund? Awesome. Then go after the parasite of the financial world – bad debts.