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Seize Tax Refund Opportunity

By Miriam De Dios

Tax season is upon us, which means that if you are working and earning income, you have tax paying responsibilities and therefore are required to file your federal and state taxes before April 15, 2010. For some people, filing your taxes means that you will receive a tax refund. While it may be tempting to spend your refund on a new flat screen television or your daughter's upcoming quinceañera, consider other options for using that refund that could better your overall financial situation.

Pay down debt

Maria Llamas, originally from Mexico, has lived in the U.S. for more than 23 years. "I don't like to owe money, but when I do, I want to pay it off as quickly as possible and that's the first thing I will use my refund for," says Llamas. Like Maria, many of us may have accumulated debts as a result of medical expenses, household living expenses or even as a result of helping out family members. By paying down debt, you not only get peace of mind, but you are also bettering your net worth and making yourself a better candidate for loans in the future. However, keep in mind that it is ok to have some debts. For example, having a car loan that you are paying responsibly can actually help build good credit for you, which may come in handy in the future as you work toward buying a new home or starting a business.

Save for the future

The government has been essentially saving your money for you, without paying you any interest for one year. Throughout the year, you survived without seeing that money and barring any debt that has to be paid off urgently, you could easily continue to save your money and actually earn interest at a credit union. "I try to visit my hometown in Jalisco, Mexico at least once a year, which means I have to pay for travel costs, have plenty of spending money and buy gifts for family members when I go to Mexico. Since I know that I will be spending that money every year, after I pay for any urgent debts, I save my refund in my savings account and withdraw what I need for my annual trip to Mexico," says Llamas. In addition to using your savings for that annual trip to your home country like Maria, you could save for a down payment on a home or to start that bakery you have always dreamed about. Your local credit union can help you with looking at various savings options, which will actually give you a return on your money.

Increase your paycheck

Whenever you start a new job, you are required to fill out a W-4 form that tells the IRS how much you want withheld from your paycheck for tax purposes. Many of us fill that form out without realizing the implications later on and that is why we end up with less money in our paychecks and a lump sum as a tax refund. You can actually approximate your withholding ahead of time so that you get more money in your paycheck and less of a refund after your file your taxes each year. The IRS has a calculator you can access to help you with this. Also, keep in mind that you can change your W-4 with your employer at anytime during the year.

While doing your taxes every year can be a painful task, you may be one of the lucky people that gets rewarded with a tax refund. Therefore, the sooner you file your taxes, the faster you will get that refund. Remember that you can also change your withholding status on your W-4 form with your employer to get more money throughout the year as well. Either way, you have many options to use that money and better your financial situation.

Published 02/09/2016

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