Smart Use of Tax Refund Can Help Achieve Goals (Opinion)

The IRS tax deadline coincides with the date of this issue, and millions of Americans will receive checks in the mail in the coming weeks from the Internal Revenue Service.

Tax refunds can help you reach your financial goals and build a cushion against future expenses.

The National Society of Accountants thus advises taxpayers to give some thought to how to use your extra cash to improve your financial situation before you spend it.

To put things in perspective, remember that a tax refund isn’t some sort of magical windfall — it’s your money that you worked hard to earn. Be shrewd with it and try one or more of these money-smart suggestions:

 • Start an emergency fund.

Very few Americans have an adequate emergency fund — money that could be used for living expenses for several months in the event of a major crisis, like job loss.

If you don’t have an emergency fund, consider opening a high-yield savings account or money market and depositing your refund for a rainy day.

While it might not be enough to create a full-fledged emergency fund, it’ll be a good start.

• Pay down your debt.

Whether it’s credit cards, an auto loan, or a student loan, consumer debt can cost you more than you think, especially if you’re only paying the minimum each month.

If you can knock out — or at least knock down — the balance of even one high-interest credit card, you’re making money. Think of all the interest you won’t be paying.

• Max out your retirement accounts.

Contribute to employee retirement accounts up to the match.

If you’re eligible, you also can contribute money to a Roth IRA that allows you to withdraw your money tax-free in retirement.

• Fund your IRA.

Did you know that you can have the IRS direct deposit your refund into your Roth, traditional, or SEP IRA?

While it might be too late to do that this year, it’s never too late to write a check to your IRA custodian when your refund arrives.

• Prepay your mortgage.

Send your refund to your mortgage lender. You’ll realize savings over the life of your loan, and you’ll own your house outright sooner than expected.

• Refinance your mortgage.

While refinancing your mortgage to a lower rate can result in substantial savings, you typically need to bring some cash to the table.

In this case, that cash could come in the form of your tax refund.

• Invest in your children.

Use tax-refund money to lay the financial groundwork for your child’s college education.

Start a college fund for your kids, whether it’s an education savings account or a 529 plan. There’s no time better than the present to get started.

• Make your living space more energy-efficient.

Replace all of your light bulbs with energy-efficient versions, put in programmable thermostats, air seal your home, get a blanket for your water heater — if it needs one — and so forth.

Doing these things can reduce your monthly energy bill significantly, so that in the long run the money you spent will become an investment with monthly dividends on your utility bills.

• Spruce up the homestead.

Home-improvement projects can increase the value of your home, so consider rolling that money into new kitchen cabinets, a freshened-up bathroom, repainting some rooms, new carpet or other flooring, or landscaping to improve your home’s curb appeal.

• Adjust your withholding.

Last but not least, consider adjusting your withholding so you don’t end up giving the government an interest-free loan during the upcoming year.  

Donny J. Woods is the elected president of the National Society of Accountants and a partner with the public accounting firm of Woods & Woods, based in Nashville. His professional credentials include Public Accountant, Enrolled Agent, Accredited Business Advisor, and Accredited Tax Advisor.

The NSA’s mission is to provide national leadership in the profession of accountancy and taxation through the advocacy of practice rights, and by the establishment and promotion of high standards in ethics, education, and professional excellence. Its strategic objective is to create and maintain a professional, membership-oriented, societal environment in which membership is imperative to support the growth and continued evolvement of a responsible and successful professional.