Tax planning: What you should do with your refund


Tax refund season may compete with the holidays as the most fantasy-fueled time of year. With visions of refund checks dancing in your head, it’s hard not to start spending before the cash even hits your bank account especially when Beyonc茅 and Jay Z announce their OTR II concert at the height of tax season.

Ahem.

“The key, no matter what position you’re in financially, is to pre-plan. Because when your refund arrives, you might lose your mind and forget all the goals you had,” says finance educator Tiffany Aliche.


Go analog and write down your obligations on a piece of paper, and stick it somewhere you can see it every day, she advises. Then, when you get your refund, you can run the drill the way it’s supposed to go.

Not sure what to prioritize? Ahead, Aliche and two other financial experts explain the best places to start when you as you cash out this tax season.

Give yourself more room to breathe and a chance for your money to grow, and pay down “dangerous debt” first, says Aliche. That means address credit cards and store cards with high interestrates and balances you havent paid in full.


Ideally, at least half of your refund check should address those expensive debts, she says, and then the other half can go toward savings and other concerns including enjoying yourself!

More: Tax planning and advice from USA TODAY


 (Photo: GETTY IMAGES)

Get your house in order

Nearly half of middle class Americans would be unable to cover a $400 emergency expense, and when you own a home those emergencies can become monthly occurrences (think leaky roof or felled tree). Alexandra Horigan, a money expert at the financial firm Aspiration, says homeowners would be wise to establish an emergency fund in a high-interest savings account “to help cushion large home repairs or other surprises that life throws at you.”

Invest

Fully funded emergency account? Debt-free? Take some of your refund to the markets and invest it, Horigan advises.


“There are great ways to invest with low minimums and fees, making it painless to start learning about the stock market. A tax refund can be just what you need to get going,” she says.

Save for retirement

Nine times out of 10, Aliche says, freelancers owe taxes. If you’re self-employed, she advises setting aside at least 30% of your income throughout the year to cover that tax bill (which can grow exponentially after taxes, fees, and penalties if it goes unpaid). You should also consider using some of your cash to save for retirement refund check or not.


“If you’re a small-business owner or a freelancer, it’s up to you to fund your own retirement account,” she says. Look into an IRA option SEP IRAs in particular are more specific to people who work for themselves.


 (Photo: Getty Images)

Make your business legit

Freelancers and self-employed workers spend a lot of time talking themselves up even to themselves. Boost your confidence, and your savings, by getting incorporated and formally declaring yourself to be in business.

“Under the new tax bill, when you pay taxes there is heavy benefit for people who are incorporated [as] an LLC,” Aliche explains. “For example, my tax rate is about 30% and a lot of people fall in that range. Corporations’ rates will go down to 21%.”


To sign up as an LLC, you’ll need an employee identification number (EIN); think of it as a social security number for your business. Registering for one through your state is free, but most states will charge a processing fees of about $150, Aliche says. So, if you do come out in the green, but haven’t incorporated yet, consider siphoning a small amount of that check to registering your business.

Start a dream fund

If no financial fires are burning and your immediate needs are taken care of, Andrea Coombes, a tax specialist at NerdWallet, says you’re well within your rights to spend your money on more exciting things your “biggest financial dreams” whether that’s purchasing a home, buying a new car, or planning an all-out vacation.

Even if you can’t get there on the power of one refund check, she says you can “start an account just for that purpose and squirrel away your tax refunds, bonuses, and other extra cash to get you closer to your best life.”

More from Refinery29:

Should You Hire An Accountant To Help With Your Taxes?
8 Must-Know Tips For Freelancers Filing Their Taxes

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