Smart Ways to Handle your Tax Return (or Lack Thereof)
It’s tax season. For some of us, that means a little extra cash is coming in. For others, it can mean owing money. Whether you’re in the black or in the red in tax terms, take some time now to be strategic with your money.
Owe more than you expected? Here are some tips to tackle tax debt.
- Consider a personal loan and stay on track
- Plan for next year
- Pay down your debt and boost your credit score
It happens. Sometimes we tick off the wrong box or plans and jobs change. Rather than use a high-interest credit card to pay off your taxes, consider a personal loan. With a fixed term, fixed rate, and fixed monthly payments, you know exactly what you owe each month.
Personal loans are a great alternative to putting your tax bill on your card. Why? Credit cards are a type of revolving credit, with monthly payment minimums that may provide a false sense of security. Minimum payment options may even encourage procrastinators to do what they do best—not what’s best for their finances.
Check your rate with no impact to your credit score.
If you owe more taxes than you expected, use this knowledge to plan for next year. Paying a little bit over time hurts less than a lot at once (think of all the subscription services you have). You could increase the amount that’s withheld from your paycheck. Or, divide what you owe this year by 12 and start setting aside that amount at the first of the month in an account you don’t touch. That way you can be ready for a hit when next year rolls around. And if you owe less next year, you’ll have a nice bit of cash to put toward something more exciting than taxes—for example, anything!
Getting a tax refund? Here are smart some smart ways to use extra funds.
Paying down debt seems like a clear choice when you have an inflow of cash, but it’s not always top of mind. Whether you’re financing a car or have several credit card balances that never seem to go down, now is the time to use your refund strategically. Paying down debt sets you up for a better credit score, which opens more doors (and savings) for the future.
- Pay off your credit cards with the highest interest rates first.
- Check if there are pre-payment fees on your auto loan. If not, consider paying down your loan.
All of this helps reduce your overall debt, which affects your credit score.
Job loss happens. Healthcare costs happen. And most often when you don’t expect them. Only 4 in 10 Americans have an emergency fund that they can rely on when unexpected expenses come up.1 Kick start or grow your rainy-day fund with your tax refund and avoid added financial stress when things don’t go according to plan.
- Look for a high-interest savings account. Rates aren’t what they used to be, so shop around.
- Plan to set aside income each month to grow this fund, based on your expenses. Creating a budget is a great first step.
In today’s job economy, skill sets are changing all the time. Use your tax refund toward a professional development or skills course, a better computing device, or a subscription that will help set you apart. The rewards of being more competitive and confident in the job market can go far beyond earnings.
Even for a state school, college tuition fees are high. Use your tax refund toward their education fund. While contributions aren’t deducted from income for tax purposes, there is no distribution tax when funds from a 529 savings account are put toward higher education. The more you know, you know?
Everyone deserves to recharge. It’s important to maintain a balanced life. Whether it’s a beach vacation or a trendy cooking class, use part of your tax refund for something fun. That way you can enjoy yourself and still stay on target financially.
Whether you’re about to write a big check to the IRS or you have some unexpected money in your pocket, you can be strategic with these tips.