Below are five ideas for using the money if expecting a refund, and five strategies to avoid losing your shirt if you owe the IRS. If you haven't completed your tax return yet, be sure to also check out my 2023 Tax Return Deadline Tips for some additional winning wisdom!
FIVE WAYS TO WIN WITH YOUR TAX REFUND
1.) Stone broke? Start winning by saving $1,000.
-If you have no money, it may be tempting to use a sudden tax return windfall for an extravagant purchase such as new clothes, entertainment, or a vacation. Wouldn’t it be something if you booked a trip with that government cheese and got a flat tire on the way to the airport or cruise dock? Many Americans are trapped in the cycle of debt because they have don't have enough money saved. Therefore, love yourself and provide a cushion in the form of $1,000 saved so that the next emergency is less likely to become a life-altering crisis. Are there bigger emergencies that will cost more? Absolutely. Keep reading!
2.) Pay off debt.
-If you already have $1,000 as your miniature umbrella, it would be wise to use the rest of your tax refund to pay off consumer debt that may be hanging over your head. The fewer debt payments you have, the more money you’ll ultimately have to save, invest, and otherwise live your life without the guilt that comes with spending money on things you know you can’t really afford. Like the Nike slogan you've had memorized for decades says: “Just do it.”
Millions of Americans have a hard time raising even a small Emergency Fund umbrella because they are mired in a vicious cycle of debt payments and having to borrow more when unexpected costs pop up. Paying off consumer debt allows people who win with money to create margin and save for the moments when, not if, the storm passes through.
3.) Boost your Emergency Fund.
-If you have paid off all consumer (non-mortgage) debt, but don’t have a large emergency fund, it is time to stop (literally) gambling against the house and square away a more serious chunk of cash to handle life’s bigger problems. The starter $1,000 will provide the anecdote for some of your basic snakebites, but what happens when a Black Mamba in the form of leaky roof, hospital visit, or HVAC Replacement sinks its vicious fangs in? If you don’t have at least $10,000-$20,000 saved, you’re going to be tempted to restart the death-spiral of borrowing.
4.) Use the money towards a long-term goal.
-If you have already conquered the prior levels in the game of winning personal finance, here are some other items that the tax refund money could best serve:
*Down payment for a house – The goals should always be to pay around 20% down and to Avoid a 30-Year Mortgage.
*Home improvements – If you’ve made it this far, surely you’d rather save for luxuries such as granite countertops or upgraded appliances than to fall into HELOC insanity.
*Post-Secondary savings – Instead of children participating in the two-billion-dollar student loan crisis, parents can participate in adding to their college/trade school fund.
*Retirement savings – According to the IRS, in 2024 you can contribute up to $23,000 into a 401K retirement plan, or up to $7,000 into a Roth IRA. Control your retirement destiny!
*Dream vacation – There are no Tik Tok or credit card hacks that can help you intelligently score that vacation you’ve always fantasized about. What can do it, then? Possibly a solid tax refund!
5.) Give the Money Away
-If you are the kind of person who experiences more joy in providing money for others rather than yourself, you could always give some of your refund away, perhaps to a church or other reputable charity. This act of generosity may also help you catch a break on next year’s taxes!
FIVE IDEAS THAT MAY HELP IF YOU OWE TAXES
1.) Be proactive and contact the IRS.
-The IRS offers a handful of options on how to address the situation of owing more taxes than you have money to pay. While this is a tough spot to be in, not paying the piper will likely lead to more trouble.
2.) Get professional help.
-Most Americans don't even wash their own car, yet some research indicates that in 2022, most U.S. taxpayers prepared their own tax returns. Um, dude, if you can’t handle getting out a hose and bucket to wash your own car, you shouldn’t be doing a federal tax return. Along this line of critical thinking, if your self-typed return isn’t looking pretty, maybe it is time to flip the script. Forbes has produced a list of America's Best Tax And Accounting Firms as a great resource to find an experienced, knowledgeable tax professional near you.
Just as you probably don’t pull your own teeth, cut your own hair, or fix your own leaky toilet, there are trained and experienced tax professionals that can help you minimize stress and maximize value from the unavoidable task of filing a yearly tax return.
3.) Double-check your withholding amount.
-If you work for an employer, you likely have filled out a W-4 Form, where you can withhold a lot of tax (mark a zero) or less (the higher the number above zero, the less withheld). This can be changed anytime based on your needs. So, if you owed taxes this year and didn't like it, try changing your W-4 number to a zero and see how that floats your boat. Just be prepared to get less of your hard-earned money each paycheck, since this approach essentially allows the government to hold onto more of your wages until next tax season. Hard pass for me, but this method may work for you!
4.) Roots not too deep? Consider moving!
-Not all states are equal when it comes to taxing their citizens. In its 2023 State Income Tax Rankings, Tax Foundation ranked each state’s individual income tax component. Feeling stressed doing your taxes each year? Perhaps you live in highly populated states such as New York or California, which were among the poorest-performing states in 2023 on this component. Meanwhile, Alaska, Florida, South Dakota, and Wyoming had a perfect score on this component due to no individual income or payroll taxes. South Dakota is particularly interesting, as the home of Mount Rushmore also was ranked by U.S. News as the 8th most affordable state in the nation (whereas Alaska and Florida are towards the bottom). While moving across state lines may seem like an extreme option, if you are not completely tied down to family, job, or school, you have the freedom to explore the potential tax savings within one of the other 49 states in the great U.S. of A!
For several reasons, including lower taxes, tens of thousands of people are moving from California to their neighboring state of Nevada each year. While there are other less extreme measures you can take to start winning during tax season, the map above shows several other examples where crossing state lines could lead to significant savings.
5.) Start budgeting for next tax season NOW!
-For various reasons such as income bracket, withholding preference, or employment status, you may be in a situation where you annually owe taxes. However, just as you always know when birthdays, anniversaries, Christmas, and other events fall on the calendar, you know that taxes are always going to be due on April 15. Therefore, there is always the option to Expect the Expected and start chipping some savings each month into an earmarked “tax fund” or other designated spot. As the saying goes, two inevitable things facing all people are death and taxes. Don’t let the latter be the cause of your former.
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