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10 dumb things to do with your tax refund

It's not often in life that we get lump sums of cash, and the temptation is great to do the wrong thing. Here's a quick checklist.

By Stacy Johnson Feb 23, 2011 1:29PM

This post comes from Stacy Johnson at partner site Money Talks News.

 

According to the Internal Revenue Service, the average American's refund for tax year 2010 was about $3,000, a slight increase over the previous year.

 

But whatever you're expecting, there are smart things you can do with it, as well as things that aren't so smart. Here are some dumb things, along with some advice on how to check on the progress of your refund if you've yet to receive it:

 

1. Spending it rather than investing it. Getting a lump sum of cash is a great time to consider investing, especially in a tax-advantaged vehicle like an IRA or other account that will allow your earnings to grow tax-deferred.

 

Saving might not be as much fun as shopping, but think about this: If you invest a $3,000 refund every year and earn 10% annually on it, in 20 years you'll end up with an extra $189,000. That means retiring three years earlier if you can live on $63,000 a year. Doesn't that sound like fun?

 

2. Not paying down debt. Every dollar you pay in interest makes your credit card company or other lender richer. Every dollar of debt you pay off makes you richer. While there's no guarantee that you can earn 10% if you invest your tax refund, here's a sure thing: If you're paying 15% interest on a credit card, paying it off is the same thing as earning 15%, tax-free and risk-free.

 

3. Not using it to generate a tax credit for next year. Can't stand the thought of not going shopping? Then buy something that will improve your home and generate a tax credit at the same time. Example? A solar water heater might set you back $3,000 to $5,000. But it will save you about 20% on your electric bill every month for years to come, and get you a tax credit next year equaling 30% of the cost. If you spend $4,000 on a solar water heater, next year's tax bill will be $1,200 lower.

 

To learn more about things that qualify for tax credits, see this page of the Energy Star website.

 

4. Failing to create a memory. Take $3,000, deposit it in your checking account, and then gradually use it in dribs and drabs. When it's over, what do you have? Nothing. If you're determined to blow your tax refund, at least buy a memory with it. Go whitewater rafting on the Snake River. Check out Vietnam. Do anything except letting your windfall slowly blow away.

 

5. Loaning it to someone. If you've been bragging about the giant check you've got coming, you've got only yourself to blame: Now your friends, relatives or kids are looking for a loan. Before it's too late, start telling everyone you made a math error, and rather than getting $3,000 back, you actually owe $3,000.

 

6. Not doing something to improve yourself. Maybe it's time to take that class that will prepare you for a better job, or get that computer or software that might help you make some money on the side. Even a new suit that might get you noticed at work. There's something you can do that will pay dividends. Now's the time to do it.

 

7. Using it to create more debt. Using your tax refund as a down payment on a car or other type of loan -- especially the kind used to purchase a depreciating asset -- should top the list of dumb things to do, especially if it's unnecessary. I'd rather you buy a used car, then go check out Machu Picchu.

 

8. Failing to prevent future big refunds. I know it feels good to get checks in the mail, but big tax refunds are really more defeat than victory. Money you get as a refund is money that you've lent interest-free to Uncle Sam all year. If you're consistently over-withholding, visit the IRS W-4 calculator and see if you should adjust your W-4 at work so you'll have less withheld from each paycheck throughout the year.

 

On the other hand, if you're more capable of doing something productive with an annual lump sum versus a slightly larger monthly income, don't change a thing.

 

9. Going to the mall. For some reason, when we get a check from Uncle Sam, some of us act like we won the lottery. This isn't "found money" -- it's your money. If you didn't need new clothes before you got your refund, you probably don't need any now.

 

10. Using it to sustain an unsustainable lifestyle. If you're one of the millions of Americans who pays a fee to get a refund anticipation loan because you need the money instantly, that's a sign you're in over your head. Do some reading on refund loans and resolve to never again pay a tax preparer to get your refund.

 

Then do what you can to reverse the dire financial situation that's making an instant refund necessary.

 

If all this sage advice has you champing at the bit, you can check on your refund by going to the "Where’s My Refund" page of the IRS website or by calling the IRS Refund Hotline at (800) 829–1954. If you mailed your return, wait at least three weeks before checking; if you filed electronically, allow 72 hours. If you use the automated telephone system, you'll need your Social Security number, filing status and the amount of the refund shown on your return.

 

More from Money Talks News and MSN Money:

5Comments
Feb 26, 2011 10:57AM
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Interesting view flame,

You say getting a refund is about beating some very heavy odds? What odds would that be? The law for the tax year is mostly in stone already so you know what you will have to pay for the total of 2011. You also know how much you are already paying per paycheck to the IRS. (Also by paying the IRS you are effectively paying into this "lottery")

 

If you like the feeling of getting a refund, look at the difference between what you should be paying and what you are paying and open a savings account to add a second direct deposit account on your paycheck that takes that difference and puts it in the savings account. You will notice no change at all, come around April 15th, make a transfer from that account to your checking, Ta'Da' you got a tax refund that is even larger than you would have before (due to it accumulating interest over the year)! Also if you underpaid you have the money to cover the tax shortfall. It s a win, win situation and you still get that great feeling.

Dec 30, 2011 11:06PM
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Coder Dave says "more money than you would have received due to accumulated interest". HA! Yeah an extra $50 or so on a $3,000 return. How many people who use their refund like a lottery ticket are going to 1) open (a) or another savings account and 2) not withdraw from that account for a year. I say let the lottery tickets keep coming cuz flat screen t.v. sales boost the economy right.
Dec 15, 2011 11:06AM
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Not necessarily... You have to pay taxes on that INTEREST you earned with your Savings account :-(
Feb 24, 2011 7:55AM
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For some getting a tax return is like winning a lottery ticket, its about beating some very heavy odds... Not having to pay in.

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