January and February each year, millions of people look forward to tax season. For them, it is a refund that they receive rather than a payment they have to make.
The question that should be on those that receive a refund is how to use that refund the improve your financial situation. There are as many ideas as there are refunds. This blog seeks to give some financially beneficial ideas for you to consider.
Things to consider as you ponder what is the best idea for your tax refunds:
What is my current financial situation? Questions to ask yourself -
Are you current with all of your financial obligations?
Are you behind on your mortgage or rent? Utilities?
Do you credit card or personal loan debt? If you have these types of debt
Do you have any savings?
Are you living paycheck to paycheck?
Is your debt out of control?
Do you get so far behind each year you cannot wait to get your refund just to make ends meet?
Are you receiving government benefits that may be affected by saving your refunds?
After you ask yourself the questions above, it is time to think about your options. These include:
If you are behind on your mortgage or rent, or utilities, these types of expenses are necessary expenses that need to be paid. If you are behind on these, first thing you should do is catch up on these bills.
If you are living paycheck to paycheck, but are getting by, you may choose to put the funds into a savings account. This will allow you some breathing room in case an emergency occurs. You can also commit at this point to adding just a little bit each pay period to the savings account and help build up an emergency fund. As we saw when COVID hit, having funds set aside in the event of an emergency can make a huge difference.
Even if you start with a part of your tax refund, you can benefit from a savings plan
After starting with a portion of your refund, commit to saving a small amount each pay period, even if it is $5-10. This will build up over time.
If you already have an emergency account established, you may wish to open or add to an IRA. If you do not have much put aside for retirement, this would be a great opportunity to add to, or start, a retirement account.
Please be aware that if you decide to put the funds into an IRA, you cannot withdraw the funds before you are 59 1/2 without penalties.
Any withdrawals from your IRA will likely result in tax consequences.
If you have credit cards or other loans, and you are current on your necessary expenses, consider paying down your debt. Examine which of your cards or loans has the highest interest rate. Paying off the debt with the highest rates can cut your debt overall and the amount you are paying in the long run. If your tax refund allows you to do so, it is helpful to use these funds to pay down some of this debt. In addtion, having a credit card available to use in emergencies may be more financially sound that paying your minimum payment each month with the funds set aside.
When you set money aside to save, the interest, if any, is generally much less than the interest on your credit cards.
If you are only paying the minimum payment each month, it will cost you significantly in the long run.
If you are struggling with debt, behind on your credit cards and other loans, and/or have extensive medical debt, you may wish to consider filing bankruptcy.
You are allowed to use your tax refunds to pay for your bankruptcy attorney and filing fees.
If you are facing garnishment or have pending lawsuits, this is a good way to stop the garnishments and allow you to pay for what you need now, not what happened in the past.
If you choose to file bankruptcy, you can start fresh with little or no credit obligations. This will allow you to recover from drowning in all of your debt. You can take action to improve your financial situation.
These are just some tips on how to responsibly use your tax refunds. Our office does offer Chapter 7 and 13 Bankruptcy services. If you are considering using your funds for bankruptcy, or just want to find out what your options are, please contact our office to schedule a consultation today.