Statistics released by the IRS show the average tax refund is $3,120. Even if you receive less than $1,000, there are still ways to use your tax refund to improve your finances.
- Save for an emergency: You can use your tax refund to save for emergency situations, such as losing a job or paying for vehicle repairs. Tax refunds can be the first step to building an emergency fund that can cushion damage from worst-case scenarios.
- Pay off your debts: Tax refunds are an excellent way to get a head start on paying down student loans, medical bills and credit card debts. Depending on the situation, this may help improve your credit score and help you avoid paying interest. If you are going to finish paying off a debt, check with your creditor beforehand to ensure you will not be charged early payment fees.
- Put it into your retirement fund: Putting your tax refund into a Roth IRA can help you save for retirement. Funds put into a Roth IRA will grow over time, meaning you can reap good rewards on your initial investment. You can also use IRS form 8888 to direct deposit your refund into a Roth IRA.
- Make repairs: Your tax refund can help finance repairs on your vehicle or equipment around the house. For example, if you need new tires or a vehicle checkup. Replacing old appliances may also help you cut down on the electricity bill.
- Save for anticipated expenses: If your health insurance premium went up this year, a tax refund may help you offset the difference for several months. A tax refund can help you save for a new vehicle. These are two examples of how you can use a tax refund for an anticipated expense.
Why Tax Refunds Can Help Prevent Difficult Financial Situations
It may be best to choose the first option if you do not already have emergency savings. Divorce, illness or job loss can happen to anyone – sometimes with little warning. Without a proper foundation to limit the damage, a small financial setback can turn into a disaster. If you received a tax refund this year, see it as an opportunity to avoid falling victim to the unexpected.
In the event you owe money to the IRS, we encourage you to read our blog from earlier this week on how to stop wage garnishments and other collection activities.
The Kansas City bankruptcy attorneys at The Sader Law Firm can help you look at options for seeking tax relief.