Americans rejoice at the prospect of receiving money through a tax refund that most of them will spend it on unnecessary things. There’s nothing bad about that as a tax refund could be one way of saving money. And since it’s yours, you can spend it however way you want to.
How to Get the Most Out of Your Tax Refunds?
But there are more practical ways to spend your tax refund since this is the money that should have been with you for about a year. This is money that could have earned interest in the bank or other investments.
Know your deductions and exemptions
A deduction is a way to lower taxable income. On the other hand, an exemption is money that you earned but will not require you to pay tax. Both these items will help you get a bigger refund from the government.
To be more specific, if you are single, you can file a personal tax exemption. For married people filing a joint tax return, one may be able to file a personal tax exemption. You may also file your tax returns separately, but only one of you will be able to get a personal tax exemption. A head of a household is eligible to get a bigger personal exemption but the requirements are stringent: you must be unmarried, a child should be living with you, and you should spend more than half of the household expenses.
Parents may also claim a dependent exemption for your child or children—as long as they are under the age of 19 or 24 for students living with you. There are still other qualifications for these, though, as there are income brackets that are no longer available to have exemptions. But the easiest way to remember this is that the higher your income, the higher the possibility that you may not be eligible for some exemptions.
In cases of deductions, there are only two types: standard and itemized. The former is easier to file and determine. But you may be able to get a higher deduction if you do the itemized list. But you can only choose one so if you have the patience and the tenacity to do the computation, do so to maximize your tax refund.
Be energy efficient
This may seem like out of base but there is actually a good reason for including this on the list. But first, one advantage is the obvious reason that you will be able to save on electricity bills when you implement energy-saving tactics at home. Even better, you are actually helping Mother Earth.
But there is also a tax-related practical reason for this: you can get tax credit. When you invest on energy-efficient system, you will be eligible for Residential Energy Efficient Property Credit, which is about 30 percent of the system cost. Here are some practical investments:
· Fuel cell property
· Geothermal heat pumps
· Solar electric systems
· Solar water heaters
· Wind energy turbines
You may also get an additional $500 refund (one-time only) if you have energy-efficient doors, insulation, roofing and windows.
Build your retirement savings
You can either contribute to a 401(k) plan or the Individual Retirement Account. To be on the safe side, we should always think about the future. We should consider that one day, we will no longer be eligible to work—either we have become too old or too frail. So it’s always good to have a cushion when we lose our job eventually.
The best way to do this is to participate in an employer-initiated 401(k) plan. In most cases, the employer sets aside a counterpart amount for your retirement plan. In this case, you would be dumb not to participate in it.
In 401(k)plans, the employer will get your pre- or post-tax amount from your paycheck so that these will be invested in your choice of firm. This way, your money will roll or earn interest, ensuring that you will have a comfortable future during retirement. Since a certain amount is deducted from your salary, your taxable income has, in effect, been reduced. This will essentially reduce your tax bill.
Get a reliable healthcare plan
In addition to having a retirement plan, some employers also offer a healthcare plan. The plan is called the flexible spending account (FSA). Just like the retirement savings through the 401(k), the employer will set aside part of your salary as a revolving fund that can be used in emergency health cases. This is another wily way to save on tax payments as the money set aside will not be taxed as a salary. The FSA is also not taxed. So you are essentially saving money for a rainy day.
The FSA is supposedly for medical and dental expenses. But a lot of people have used the amount in order to pay other obligations: deductibles and co-payments. Still, the most common uses for FSA are related to medical activities: prescription and over-the-counter medicines, reimbursement of insulin and medical equipment like crutches, medical supplies like bandages, sugar kits and many others.
Deduct medical costs
Did you know that you can actually get a tax deduction from the medical expenses you’ve incurred? For all the complaints we lodged on the government, it is actually working. You are eligible for a tax refund if you have spent about 10 percent of your adjusted gross income (AGI) on medical stuff: health insurance premiums, dental and eye care, even your transportation expenses going to and from medical appointments.
The government looks fondly at people who donate. Not only are you helping out the less fortunate, you can also get a tax deduction. You can donate to a charitable institution or any other organizations that are legal entities or at least registered as such. If you are doing this just to get a tax deduction, make sure the organization you have eyed on is legitimate to make your donation count.
Start an emergency fund
Tax refund is among the easiest to spend because it usually is a large amount—on the average, a person receives between $2,500 and $3,300 in a tax refund. Most people are so overjoyed by it they immediately shop for things they don’t need. Be practical. Put the refund in an emergency fund—a necessary source that is usually neglected by people.
An emergency fund is your cushion fund just in case you lose your job. In most cases, it represents three months of your salary, which would help you survive for three months while you look for another job.
Pay your debt
Americans have this loan culture. We are taught that it’s okay to loan at an early age. As soon as we graduate from college, most of us are already in debt: student loan. Then credit cards have become a permanent fixture in our wallets that we actually think it’s money we can spend when it is just the opposite—it’s money we don’t have. Debts entail interests that we don’t need. So if you get a tax refund, pay a chunk of your debt.
Start a side business
The hardest thing in starting a business is getting the capital. Now here comes the tax refund, a big enough chunk of money that can already start a business. Go for it!
There’s a reason why this is number 10 on the list—this should not be the first thing you will do when you have a tax refund. But if you have most of the nine things ticked out—you already have a side business, you don’t have debts, etc.—then perhaps the tax refund is a great way to invest on memories. Make memories with the family by travelling or going on vacation. Do something that you don’t normally do: an adventure of a lifetime.
For a day in a year, Americans can really feel they are loved by the government through the tax refund they receive. But you should always remember that this is not money that the government is giving away. This is YOUR money that was left in the coffers of the government for some time. And since this is YOUR money, spend it wisely. You worked hard for it so make sure it counts.