For most people, income-tax returns have been signed, sealed and delivered. Now comes the challenge of using refunds wisely.
Roughly four in five Americans are receiving a refund, according to preliminary Internal Revenue Service statistics. For moderate-income individuals, it’s one of the biggest lump sums of cash many people get all year.
If you could avoid spending your refund and save it instead, that effort could put you on a much sounder financial footing.
Through April 5, the average refund reported so far this year by the IRS was $2,755. By comparison, 28 percent of people surveyed recently by the Employee Benefit Research Institute reported having less than $1,000 in total savings, excluding the value of their homes and pension plans, if any. Another 18 percent said they had less than $10,000.
Perhaps more alarming, 38 percent of respondents said they’d have trouble coming up with $2,000 to pay for an unexpected emergency within the next month, according to the same survey.
Reduced take-home pay this year isn’t making the job any easier. Expiration of the temporary Social Security tax holiday means workers again are paying a full 6.2 percent of their earnings in Social Security contributions, up from 4.2 percent last year. No wonder more people say they’re putting less money toward an emergency fund, contributing less to their retirement accounts, missing bills or otherwise cutting back, according to a survey this year by the American Institute of CPAs.
Hence the importance of using a tax refund wisely. According to the AICPA, taxpayers should prioritize, using refunds first to pay for basic necessities, then to build up an emergency fund and finally to pay down debts. If tackling IOUs such as credit cards, the group suggests paying down balances carrying the highest interest rates first.
But everyone’s situation is different, and the real goal of wise refund utilization is to use the money to help boost your long-term financial stability.
Patricia Olivas, a 38-year-old Phoenix woman, said she has used refund money to pay off credit-card debts. She also bought a reliable used car that helps her commute to her school-district food-service job. She eventually hopes to purchase a home.
Olivas received tax-preparation help through a program offered by Valley of the Sun United Way and Volunteer Income Tax Assistance or VITA, the moderate-income tax-help site run in conjunction with the Internal Revenue Service.
Last year, more than half of the taxpayers served by the United Way-VITA effort used their refunds to pay for basic needs such as housing, transportation, tuition or medical care. Thirteen percent used their refunds to launch an emergency savings account. Tax assistance and refund counseling are among the United Way’s focus on helping people improve their financial stability.
A key focus of the program is to help eligible taxpayers prepare and file their tax returns and claim credits to which they’re entitled, said Charlie Boyce, vice president of community impact for the Valley of the Sun United Way. The Earned Income Tax Credit is the largest federal anti-poverty program, yet one-fifth of eligible taxpayers don’t claim it, he said.
In addition, the taxpayer-assistance effort tries to help people utilize their refunds wisely such as by having people split their refunds among two or more financial accounts, Boyce said. The goal is to have at least one pot of money devoted to savings.
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