Make your 2008 tax refund work harder for you
(COLUMBUS, April 9, 2009) – The IRS reported in March that more taxpayers are receiving refunds this year, with the average 2008 refund coming in at $2,811. That’s good news at a time when many people could use extra money to meet expenses or replenish their savings.
If you are one of the millions of taxpayers receiving one, think carefully about how you will spend it. During Financial Literacy Month, The Ohio Society of CPAs offers these tips for helping you stretch your refund farther.
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Decrease Debt. If you are carrying high-interest debt from credit cards, major purchases or student loans, use some of your refund to decrease the balance and reduce the overall amount you will pay in interest
- Add to your emergency fund. If you don’t have an emergency fund or tapped your existing one in the past year, replenish it. Financial experts recommend maintaining a cash reserve that will cover three to six months of fixed expenses in the event of a job loss or other financial crisis.
- Save for Retirement. Invest a portion of your refund in a retirement savings plan such as an Income Retirement Account. IRAs are a great way to save money immediately and for your future. You’ll receive either a deduction or a credit on your 2009 return for a portion or all of your contributions. Plus you won’t be taxed on any interest you earn until you withdraw the money at age 59½ or later. Your tax rate will likely be lower in retirement because your income should also be lower.
- Pay down your mortgage. Mortgage interest is tax-deductible. Consider making an extra mortgage payment before December 31st to increase your deduction. Or add additional money to each month’s payment to reduce the principal amount you owe.
- Make energy efficient upgrades to your home. There are incentives in the 2009 economic stimulus package for taxpayers who make energy efficient upgrades to their homes. If you install new windows, insulation, hot water heaters, central heating or air conditioning systems, you may be eligible for a Residential Energy Property Credit of up to $1,500 on your 2009 taxes. Plus you’ll be improving the value of your home.
- Fund Your Education. Use your refund to start a college savings account for you or a dependent. A 529 college savings plan is a good investment because the interest is tax-deferred. As long as withdrawals are used for qualifying educational expenses, they are tax free. See IRS Publication 970 for more information.
- Have Some Fun. If you’re meeting monthly expenses and have paid down your short-term debt, it’s okay to spend a portion on something fun. A good rule of thumb is to spend no more than 15 percent of your total refund and don’t use it as a down payment to finance something that really costs more. Adding to your debt load will just cause more financial stress throughout the year.
Contact a CPA for more tips or visit the Financial Fitness Ohio Web site where you can find financial advice for all stages of life and subscribe to a free weekly podcast.
The Ohio Society of CPAs, established in 1908, represents more than 23,000 CPAs in business, education, government and public accounting. The Ohio Society’s members not only meet statutory and regulatory requirements as CPAs, but also embrace the highest standards of professional and ethical performance. This is achieved through ongoing professional education, comprehensive quality review and compliance with a strict Code of Professional Conduct.
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LAST UPDATED 4/9/2009