Tax return money appears every spring and usually disappears as quickly as it came. While it may seem like a bonus that exists outside the regular budget, a tax refund is part of your annual income and should be treated as such. So instead of blowing your return on a new toy, budget and use it to accomplish something.
When completing your taxes, request a direct deposit but don't send the money to your checking or savings, put it right into your IRA, education fund or health savings account. IRS' Form 8888 allows individuals or advisers to request and make such deposits as long as they take place before the deadline for filing your personal income tax return, which typically is April 15. After the deadline, it'll be counted toward the next year's return. In all cases your deposit will remain tax-free until you withdraw it from your IRA.
Use the refund money to pay off all or part of a high-interest debt. Over the life of the loan, the reduction of interest paid due to your lump sum tax return payment can amount to more than you would have made by investing the money. In addition to reducing the amount of interest you pay and the principal of the loan, an annual payment using your tax refund can also reduce the number of payments you have to make overall. If you decide to pay off a credit card balance, the money will still be there if you need it since the reduced balance means there is more available to spend on the card.
Make a lump sum payment on your mortgage and reduce the principal so you save interest charges and lower your payments over the life of the loan. As long as your loan doesn't come with penalties for early payment, this is a great way to make an immediate impact with your tax return money. If your lender doesn't allow you to do so, put the refund into the bank and divide it by 12 for the number of months in the year. Each month take out the amount calculated and put it toward your mortgage payment. This should reduce the pressure on you throughout the year when the loan bill arrives and leave you with a bit more income each month.
Create a separate account to hold a fund for such emergencies as unexpected auto repairs, medical needs or loss of employment, and have your tax refund deposited into it. Try to accumulate enough money to carry you through six months to a year without income. If anything happens you will be as ready as possible for that rainy day.
Spend your tax refund for an addition to your home, a new appliance or other updates that will positively affect the property value. Whether you live in the house forever or choose to sell it next year, the improvements you make will not go unnoticed. If you opt for energy efficiency improvements, your investment can bring you an even larger tax refund next year when it comes time to report your deductions.
Invest in educational or professional classes that can help you to achieve personal goals or add to your career success. If you use your refund to pay for courses that lead to better productivity at work, a raise or a promotion, the money you make in return will more than pay back whatever you spent. Alternatively, take classes to learn a new language, play a musical instrument or acquire a useful skill.
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