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How to spend or save your tax refund?

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Posted on: 05/25/16

Tax System in the United States of America-The Basics.

tax refunds.

Did you know that in America we have three types of taxes? These include the progressive tax system, the proportional tax system and the regressive tax system. The progressive system is where higher income people pay more taxes than lower income people. A good example of this is personal income tax. Here, the tax rate increases as a person’s income grows. It is argued that this tax system is fair as those with higher income pay more than their counterparts with lower income.

The proportional system on the other hand is where everyone pays taxes at the same rate irrespective of their income. A good example of this is sales tax. Despite the income you make, you will be subjected to the same rate as everyone else. It is argued that this tax system favors the rich since they spend less of their massive income.

The regressive system is where tax decreases as the income subject increases. This type of tax is normally associated with everyday goods like food. Well, now that everyone has to purchase food, the more money you make, the less you will be affected by the tax as it will be a smaller portion of your income. Regressive taxes normally hurt people with little income as it represents a bigger portion of their income.

What is a tax refund?

An income tax refund is a kind of tax rebate. In simple words it is a return on taxes you receive when the amount of tax liability is less than the actual tax paid in a single financial year. Taxpayers in the United States generally receive average tax refunds of between $2,000 and $3,000 every year after filing taxes. For most people, getting a tax refund is like receiving an unexpected gift and the thought of going on a shopping spree is simply irresistible. However, before you go ahead with those plans, hold out a little bit and consider these strategic ways of using your check or direct deposit.

· Pay off your debts

In as much as it isn’t exciting, paying off your debts is one of the most solid ways of using these funds. The fact about debt is that it continues to accumulate with time ultimately impacting negatively on your credit score. Even for those with higher interest debts like credit card debt, if you can manage to pay down your credit cards or even better pay it off totally, you will give yourself greater financial security.

· Jumps start your savings

The fact of life is: we all need some money for a rainy day. So, if you are looking at a fairly substantial amount of money and you have little savings, it’s wise to put it there. You will feel more secure throughout the year knowing that you are covered in case something unexpected came up and you need finances. In the same way, you should also consider putting away some of the cash into a long term savings plan such as a fixed deposit account with high interest rate..This is a perfect way of safeguarding your future.

· Invest

You can opt to use tax refund to purchase stock or even real estate. That way, the money will be working for you as opposed to the government. Whichever way you decide to invest your tax refund, just ensure that you do research prior so that you invest where you are likely to get maximum returns. Before making any investment decision, talk with your financial planner.

· Start an education fund

Let’s face it. College is expensive but a worthwhile investment for all careers. In view if this, start saving for tuition fees for your child, or start a fund for yourself. The fact of life is: everyone benefits from education so after a few years of saving your tax refund checks, you may be able to pay tuition fees and set yourself on a path of career success.

· Buy a bond

The government makes it easy for you to buy a bond with your check and for a good reason: you are putting money back into government’s initiatives. Generally, buying bonds is safe and provides a decent return on investment especially considering the little risk involved.

· Car repairs and maintenance

The fact is gas prices keep skyrocketing every now and then leaving little money if any for emergency car repairs and maintenance. You can protect your investment by doing some simple maintenance which will prevent bigger expenses down the road. In the event of selling your car later on, you will have bigger returns.

· Make extra payments on your loans

Using tax refund to make extra payments on your loans whether it is a property or automobile loan is a wise move as it will reduce the outstanding dues and shorten your repayment period. So, if you are servicing a loan, you can seriously consider using your tax refund for this. You will be grateful later on.

· Plan a lavish summer vacation

You can also opt to take your family to some exotic location during summer with the tax refund cash. Once in a while it’s good to spoil yourself and loved ones -travel by air, check in lavish hotels, wine and dine and your tax refund will cater for all this. In as much as it is good to unwind by taking a vacation every now and then, just remember to use your tax refund in other beneficial ways in order to reap maximum benefits from it. 

Using your tax refund in any of the ways discussed above will help you utilize it wisely as opposed to squandering it within days of receiving it. In doing so, what you ought to bear in mind about investments is that it is something that will mature over time; therefore it should not be prioritized over paying off debts.

This also goes for vacations. Overall, tax refund is supposed to bail you out financially where you have been stuck, hence the need to use it wisely to avoid future regrets. In view of this, if you are undecided on how to spend your tax refund, contact your financial adviser for recommendations based on your unique financial situation and the particular details of your refund.

Thank you.



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