Ideas for Your Tax Refund

Tax filing season is never fun, but for many Americans, the silver lining is the refund they’ll receive when it’s over. If you’re one of the individuals who received, or expect to receive, money back from Uncle Sam this year, here are a few ideas for putting those funds to good use.

Pad your emergency reserve | A general rule of thumb is to keep at least 3-6 months’ worth of expenses in liquid assets to protect against unforeseen circumstances (i.e., job loss, short-term disability, unexpected car or home expense, etc.). This fund may consist of checking/savings accounts, money market funds, or short-term CDs.

Pay down debts | Whether it’s a vehicle loan or credit card, the interest rates on these accounts essentially act as a negative return on investment. That’s why it’s important to pay off high-interest debt as soon as feasible, assuming there aren’t any pre-payment penalties.

Fund an IRA | Depending on your Modified Adjusted Gross Income (MAGI), you may be eligible to make a contribution to a Roth IRA or a deductible contribution to a Traditional IRA. You can contribute up to $6,000 this year, with a $1,000 “catch-up” contribution available to those aged 50 and older, assuming you have earned income.*

Contribute to a 529 plan | If you expect your children (or grandchildren) will go to college, these accounts can be the perfect savings vehicle. Section 529 plans let you contribute on a potentially state tax-deductible basis (depending on where you reside) and distributions are tax-free if used for qualified higher education expenses. Note, the owner of the account can impact financial aid so be sure to consult a professional.**

Donate to charity | For those who itemize deductions (or plan to) and are charitably-inclined, donating cash or property to a qualified organization can have a sizeable impact on next year’s tax bill. In general, contributions to charity can be deducted by up to 60% of AGI, but a 30% limitation may apply to certain organizations. Consider a “donate-and-replace” strategy: donate highly appreciated stock and re-purchase with your tax refund.

Start a vacation fund | By utilizing a separate account for these expenses and contributing a small amount periodically, you can avoid having to tap your investments to finance your next trip. You’re also less likely to spend this money on anything else since it will be “out of sight, out of mind.”

Make improvements to your house | Similar to the vacation fund, you could build a dedicated account for future remodeling expenses. These upgrades can be especially helpful if you plan to put your house on the market soon. You’ll also benefit from a tax standpoint as these types of improvements will increase your cost basis in your property (which means less taxable gain!)

Invest in a taxable account | If you still have refund money left over after allocating it to other items, consider investing it. This is a great opportunity to put your money to work for you, especially in a non-qualified account that is eligible for preferential capital gains treatment.

You should attempt to keep your refund as low as possible each year, otherwise you’re essentially giving the government a tax-free loan. To reduce the chances of that happening, make sure your current withholding is as up-to-date and accurate as possible. To adjust this, all you need to do is file a revised W-4 with your employer. You can use online tools to help calculate the correct amount.

If you’re looking for the best way to put your refund to good use, contact us here and we’ll help you formulate an individualized plan. 

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DISCLAIMER: Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

*The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

**Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

About the Author
Stephanie McElheny, CFP®, EA, ChSNC™

Stephanie McElheny, CFP®, EA, ChSNC™

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Stephanie is a Wealth Planner and Vice President at Aspen Wealth Strategies. A Certified Financial Planner™ professional with close to 10 years of industry experience, Stephanie is incredibly passionate about identifying opportunities and implementing comprehensive financial planning solutions for both individuals and businesses.As a Chartered Special Needs Consultant™ and an Enrolled Agent, Stephanie’s specific expertise includes special needs planning as well as individual and business taxation. Stephanie also holds Series 7, 66, and Life, Accident, and Health licenses.Prior to joining Aspen Wealth Strategies, Stephanie has acted as a Director of Financial Planning and a Registered Investment Advisor for both small and large investment management firms. A Pittsburgh native, Stephanie has served as President and Symposium Chair of the Pittsburgh chapter of the Financial Planning Association (FPA), among other roles. She also spent time on the pro-bono committee, offering financial literacy education to seniors, veterans, and underprivileged families.Outside of work, Stephanie enjoys spending time with her husband, Steve, and their corgi, Myron. She is an outdoor enthusiast who loves hiking, camping, cycling, and snowboarding. Stephanie also takes great pride in cheering on her hometown sports teams and alma mater – the Pittsburgh Steelers, Penguins, and Pirates and the Penn State Nittany Lions.

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