Putting Your 2016 Tax Return to Good Use
If you're lucky enough to get a check from yourself this year, there are many smart ways to spend it.
You've done it: After gathering together all the receipts, filling out each line on every form and checking your math, your taxes have been successfully filed for another year. Now you wait for the best part of filing taxes: the refund check. According to the IRS, in 2015 Americans received a tax refundtotaling over $3,500 on average. The weeks including and shortly after tax-filing season are known to coincide with a slight bump in consumer spending as refund checks get cashed. Many look forward to this time of year, as it feels like getting a free gift from the government. If only this were actually the case.
"Millions of Americans remain mired in debt."
As nice as it is to receive that check, getting a large tax refund means you spent more than you needed to on taxes in the previous year. Essentially, your refund amounts to the government returning money you let them borrow for a year at zero interest. Getting a tax refund isn't the same as finding some money on the street, so it's not entirely wise to treat the money as such. This is especially true given the average American's poor financial fitness. In a survey conducted by Bankrate in December 2015, it was revealed as that as many as 40 percent of Americans would be unable to handle an unexpected emergency expense of $1,000 with savings alone. And of course, many remain mired in debt from student loans, mortgages and credit card payments.
If you're lucky enough to get a check from yourself this year, the IRS offers some handy tools for tracking its progress through their systems. Once it has arrived, there are many great ways to spend it.
Tracking your refund
The IRS knows that millions of Americans wait with unbridled anticipation each year as their tax returns get processed and their refunds are approved. In the interest of giving taxpayers some peace of mind - and also to reduce the number of people anxiously calling to ask where that check is - the IRS has created a helpful online tool for tracking your refund. Aptly titled "Where's My Refund? ," the site requires only your name, Social Security number and the exact amount of the refund you're expecting. Then it magically summons a tax elf to search for your refund by hand - just kidding, it's in a database somewhere. The website can give you an accurate timeline that shows where your return is in the approval process, as well as an exact date when you can expect your refund check to arrive. This usually takes around three weeks. If you chose to get your refund as a direct deposit, it can come even faster.
Kelly Phillips-Erb of Forbes suggested nervous taxpayers not bother with calling the IRS help line to find out the status of their refund. If you can even get in touch with someone without waiting forever, they likely won't be able to tell you anything more than the website. In any case, concern is only warranted if your refund still hasn't arrived within 21 days of the return being sent.
Was your refund a record-breaker this year? Before you celebrate, think about how much you could be overpaying or overwithholding. For example, if the average American receives a $3,500 refund, that's an extra $135 coming out of each paycheck (assuming a biweekly pay schedule). Use this W-4 withholding calculator to figure out the right amount of taxes you should be taking from each paycheck.
How to spend your refund
Again, treating a tax refund like a windfall isn't the most financially responsible way to handle it. Instead, use the money to get yourself back on solid financial ground with these suggestions from Bankrate:
- Strengthen your emergency fund: Life is expensive. Instead of relying on credit cards or loans when disaster strikes, work to build up a savings fund for unexpected expenses. Exactly how much you should save varies - some recommend at least three months of minimum expenses, while others suggest saving for an entire year. In any case, having a good savings cushion will come in handy for medical bills, car repairs or sudden unemployment, among many other things.
- Pay down debt: Debt can be extremely expensive over time. If you get a sizeable refund check, use it to pay off some or all of your credit card or loan debt instantly. Your future self will thank you.
- Invest in yourself: If you're in good shape with savings and debt-free, use your refund to begin something you've been waiting to do all along. Take a class to hone skills or learn new ones. Look into continuing education courses for a great way to advance your career.
For more ideas on how to spend and save more wisely, visit the financial professionals at Vectra Bank.