It’s pretty rare to end up with an extra hundred (or thousand) bucks in your bank account -- unless it’s tax-refund season. While it may be tempting to blow that dough on a massive TV, there are ways to stretch your tax refund further so you can reap financial benefits throughout the year, even if you do throw down on that flatscreen. To help explain how to do it, we leveraged the advice of H&R Block Tax Expert Lynn Ebel, who broke down the best ways to get on better financial footing or treat yourself (wisely) this upcoming tax season.
Side note: Getting a massive tax refund isn’t necessarily a good thing; it probably means you’re withholding money you could otherwise use during the year, Ebel says. If you’re unsure how some new life changes, like marriage or a baby, will affect your tax withholding, go over your W4 through your employer to ensure you’re withholding the correct tax amount. “An H&R Block survey found 47% of respondents didn’t know they could update their W4 at any time,” Ebel says. “In your 20s and 30s, the most important thing is to pay attention.”
Because doing your taxes can be incredibly confusing, H&R Block has several different ways to file, whether you want to go the DIY route or bring it in to a professional. They even offer virtual tax help from a real professional via their Tax Pro Go service, so you can have an expert prepare your taxes while you stay in your pajamas this year.
FIX YOURSELF IF…
It’s tempting to spend extravagantly when a large chunk of what feels like free money lands in your bank account. But, if you’re smart with your refund now, you’ll be able to treat yourself later, sans additional debt or hardship. Here’s what to consider:
You have some credit card debt
Credit card debt is high interest, and there are no tax benefits for carrying it, so if you can wipe out debt with your refund, you will save yourself more money over the next year, in both interest and nixing that regular monthly bill. Don’t stress too much about student loans, though: these are typically low interest, and the interest you pay may be tax deductible. “There are so many taxpayers that miss tax benefits for paying for education because of their complexity,” Ebel says. “Once students graduate and begin repaying their qualified student loans, they can start deducting their student loan interest, up to $2,500, even if they don’t itemize their deductions.” So, if you’re close to paying off your loan, using your refund to be rid of the debt might make sense. But if you’ll only be chipping a portion off of your principal, saving the cash instead to have on hand for an unexpected expense will likely be more worthwhile in the long run.
You don’t have an emergency fund
Less than half of Americans have at least $1,000 in savings. That means when unexpected emergencies pop up -- medical bills, a job loss, car trouble -- they need to take on debt to cover their bills, or worse, take a major hit to their credit score by missing payments altogether, and paying even more money in penalties. A healthy emergency fund should cover three months of bills, so use your refund to get you a little closer to that goal in 2020. “You can have the IRS direct deposit your refund into a bank account, including straight into savings, and that makes it harder to spend for you,” Ebel says.
You get your income from a single source
Everyone can benefit from a side hustle, and in the case of your tax refund, you can put it to work in the stock market. So, take this opportunity to get your investment portfolio on the right track. Don’t be too worried about investing making your taxes overcomplicated, either, as you’ll only owe taxes on stocks and bonds that you sell for more than you initially paid. Basically, there’s potential to make money doing absolutely nothing, practically tax-free! (And, if you do have a few questions about the tax benefits or obligations regarding certain investments, an expert tax pro can help answer them when you use H&R Block’s Tax Pro Go.) It’s a treat-yourself situation in the long term, and easy to set up with an online investment portfolio. Picking up a new side hustle beyond Wall Street bets could come with added tax benefits for next year, too (but more on that in a bit).
Your retirement savings is lackluster
Retirement contributions are a big tax break, as the amount you contribute to a traditional IRA can be tax deductible (up to $6,000). So, opening a retirement account with your refund can mean big savings in 2020. If your employer offers a 401(k) plan, though, there’s a little more communication and paperwork involved to see some tax benefits, according to Ebel. Putting your refund into your 401(k) isn’t as simple as just making a direct deposit. But, you can increase your contribution from your paycheck, and then just use your refund to make up the difference when it comes to covering rent. “There’s no way [for those funds] to go directly from your refund into the 401(k) because it has to be maintained through your employer,” Ebel says.
HAVE SOME FUN IF…
When your top-line financial basics are covered, using your refund to splurge on a vacation or big-ticket item is totally valid. And, H&R Block makes it easy to file your way AND get your cash as quickly as possible. But, that doesn’t mean you shouldn’t be savvy about spending your refunding though -- and these treat-yourself ideas pull double duty by packing some unexpected financial benefits. “Don’t just spend to spend though,” Ebel warns.
It’s time for some new wheels
The average American spends 19 full days per year just commuting to work in their car, so if yours is in the shop more often than not (or still rocks a tape player) it may be time to upgrade to a safer model. Using your refund to buy a vehicle outright is preferred, but even having a bit more to put toward a down payment may make the interest rate on your loan better, too. Instead of buying a brand-new car, though, look for a used option with low mileage that’s only a year or so old -- cars depreciate 20% in value within the first year, so you get a practically new car at a huge discount. That splurge now may even get you some cash back come tax time next year: Some energy-efficient models include the added benefit of a tax credit.
There’s a big-ticket item on your wishlist
Maybe your furniture is looking dated, your mattress is keeping you awake at night, or you really need a new winter coat. These are pricey items that would typically take time to save for, and if you’re impatient, they’ll likely end up on a credit card (or, worse, you’ll be sold on opening a line of credit at the retailer for a quick discount, which can pack an even higher interest rate). Using your refund to spark joy in your home or for a better night’s sleep sans new debt is a win-win.
You want a new laptop or mobile phone
If your phone is cracked to the point that you’re getting glass splinters, or your laptop lags when you try to open a GIF, it’s time to update -- for your own sanity. For starters, if you’ve been leasing your phone from your wireless carrier, buying a new phone outright will decrease your monthly bill. If you’re self-employed or an independent contractor who uses that laptop or phone for business purposes, you’ll even see some federal tax benefits. “Unreiumbursed employee deductions went away [on federal returns], but some of those same expenses can lower self-employment taxes,” Ebel says. “You can write off your mileage if you drive for Uber, [or] the cost of goods for items you create and sell on Etsy.” While average employees can’t write off work-related expenses (including laptops and phones) on their federal income taxes anymore, some states still allow this deduction -- and some states will let you itemize deductions on your state return, even if you opt for the larger standard deduction on your federal, Ebel says.
You need to use your PTO
Not taking your vacation days is like leaving cold hard cash on the table -- and in your employer’s pocket. Besides the added benefits of better productivity and mental clarity when you get back to the office, taking time off even comes with a few financial perks. For one, employees who don’t take vacations are less likely to get promotions and raises. Ebel says that if you’re spending your refund, you should make sure you’re investing in yourself; your future self will thank you. Besides better work performance, traveling to another country can also literally make you more creative and have better memory retention. And hey, if you’re planning a trip to Las Vegas, gambling losses that are less than your winnings are actually a tax write-off.
Now, we realize there’s enough financial jargon here to make your head spin. Luckily, H&R Block has experts available online and in person to break down even the most complicated tax topics, and several ways for you to file your taxes. Plus, if you’d rather leave your tax return to someone else, H&R Block’s Tax Pro Go service matches you to an expert who specializes in your unique tax situation. You just submit your documents online, and your tax pro will find every deduction and credit you deserve. You’ll save time, save stress, and still get the biggest refund possible -- just make sure you’re spending it wisely.
