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What You SHOULD Do with Your Tax Refund

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Stop! Don’t buy that new iPhone with your tax refund! You can put it to much better use!

The money you get from your tax refund can be a great way to set yourself up for a better financial future. If you are expecting a pretty decent tax return this year, here are some smart ways to make your money work harder for you.

Invest for Emergencies

If your transmission in your car went out right now, would you be able to afford to replace it?

Did you know it is recommended to have between three and six months of living expenses in a liquid savings account?

If you do not have any type of emergency fund, using your tax return to start one might be extremely beneficial for you. 

https://www.smartaboutmoney.org/Topics/Insurance-and-Taxes/Tips-for-Filing-Taxes/Smart-Ways-to-Use-Your-Tax-Refund

Instances like this are exactly what an emergency fund is for. You don’t need to save all of your tax refund for emergencies, but it is best to put back as much of it as you can.

Pay Off Debt

Credit cards typically have a high interest rate making them hard to pay off. Instead of booking a vacation with your tax return—which might not be that fun right now anyway—pay off some of your debt instead.

  • Start with your debt that has the highest interest rate, such as your credit card balance that seems to never get any lower.
  • Getting rid of this type of debt will save you money in the long run by avoiding all of the interest charges. 
  • If you don’t currently have any credit card debt, or you don’t have an interest rate/balance that is manageable, consider paying down the balance of your car or your student loans.

Both of these actions will save you money on interest as well.

Invest for Retirement

There is no such thing as too much money when you are heading into retirement. Sure, you might already have a retirement plan, like a 401(k) where your employer matches your contributions. However, you can also open an IRA to increase your savings for the future. 

There are two types of IRA accounts: Roth and Traditional. When you put money into a traditional IRA, you get an upfront tax deduction. The money will grow tax-deferred, but you will need to pay taxes on the money when you start taking money out.

https://www.moneycrashers.com/what-to-do-with-your-tax-refund-money/

When you put money in a Roth IRA, there is no immediate tax deduction, but when you start taking money out in the future, it is tax-free. There are no required withdrawals with a Roth IRA, meaning there is some more flexibility in it. 

There are limits to keep in mind when it comes to IRA accounts and 401(k) accounts.

If you are under 50, there is a maximum contribution of $6,000 in an IRA and $19,500 in a 401(k). If you are over 50, there is a maximum contribution of $7,000 in an IRA and $26,000 in a 401(k).

Put Money in a College Fund

If you are a parent, you might be wondering how you can save for your child’s college education. The best way to do that is with a 529 college savings plan, which is similar to a Roth IRA.

Your money will grow tax-free, and as long as it is used toward education.

There are two different types of 529 plans. The first is a college savings plan and the second is prepaid tuition. 

The college savings plan is similar to a Roth IRA account because you invest after-tax money in mutual funds. This plan will fluctuate in value depending on the value of the investments. 

The 529 pre-paid tuition plan will allow you to pay for all or part of in-state tuition at a public college. They might also be able to be transferred to an out-of-state college. There is also an option for a private college prepaid plan.

Increase Your Down Payment

If you are saving to buy your first home, your taxes can increase your down payment. This can help save you from expensive private mortgage insurance and can also reduce the overall mortgage that you take out.

If you already own a home, you can use your refund to do some improvements around your home. Improvements and renovations can help increase the resale value of your home.

Even if you aren’t planning on selling your home any time soon, improvements are always a good idea. Renovate that bathroom or finish the basement, whatever your house needs!

Make a Donation

Donating is a great way to invest in something that you are passionate about. Focus on finding charities that do the best for people.

Before you donate any money to a charity, do not be afraid to ask the charity’s representative some important questions. Ask them how they spend the money that you are giving them and how they are changing the world.

There are so many charities that are worth donating to. The representatives will be happy to answer those questions for you.

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The Best Way to Invest a Tax Refund in 2021

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A tax return can be used for more than just buying your girlfriend a Gucci bag. It can be a great way to get yourself financially ahead. All you have to do is make it work for you.

If this is something you are interested in doing, here are a few smart financial investments you can make with your 2021 tax refund.

Pay Off High-Interest Debt

Typically, credit cards have a high interest rate which can make it seem impossible to pay them off.

Instead of booking a vacation or buying a new TV with your tax refund, take a shot at some of your debt instead. And, start with your debt that has the highest interest rate. Getting rid of these debts will save you money every month.

If you don’t have any credit card debt, use your refund to pay down your student loans, car payment, or mortgage.

Max Out Your 401(k) Contributions

Whether you are saving with a 401(k) offered through your employer or you are saving in an IRA, the more you put into your plan the less tax you will have to pay on it.

There are contribution limits, so it is important to keep that in mind. However, maxing out your contributions early in the year can put more money in your pocket each paycheck.

If you are under 50, you can put a maximum of $6,000 into an IRA. If you are over 50, you can put a maximum of $7,000 into an IRA.

A 401(k) has larger contributions, up to $19,500 if you are under 50 and up to $26,000 if you are over 50.

Fund Your Health Savings Account

With a health savings account (HSA), you can set money aside for medical expenses. This money can be used immediately or invested and used in the future.

HSA contributions are made with pre-tax money, so whatever you put in this account will not be taxable by the IRS. 

Eligibility for an HSA depends on your insurance plan. Here are the basics:

  • If your deductible is $1,400 or more as an individual with an out-of-pocket maximum of $7,000, you will be able to qualify for an HSA.
  • If your insurance plan is for a family, your deductible will need to be a minimum of $2,800 and the out-of-pocket maximum will need to be $14,000.
  • An individual can contribute $3,600 if they are under 50 or $4,600 if they are over 55.
  • Family plans can contribute $7,200 when the policyholder is under 50 or $8,200 if they are over 55.

Down Payment or Home Repairs

If you have been saving to buy a house, consider using your refund to increase your down payment.

This can save you money on your overall mortgage amount and your monthly mortgage payments. 

If you are already a homeowner, consider using your refund to fix up some things that have been put off due to lack of finances.

Replace the leaky faucet in the bathroom or replace your roof. Using this money for improvements can also increase your home’s resale value if you decide to sell your home in the future.

Invest in the Stock Market

If you would like to do something for your future besides putting money into a retirement fund, consider purchasing stocks.

https://investorjunkie.com/investing/tax-return-refund/

The market is known historically for providing better returns than both savings accounts and Treasury bonds. However, it is important to know that stocks aren’t secure, and returns are not guaranteed.

Stock prices fluctuate and the market can be risky. Financial advisors often do not recommend investing in the stock market if you are trying to save for the short-term. The market is much better for saving for long-term financial goals. 

You can invest in individual stocks or mutual funds. Mutual funds are bundles of stock, usually purchased through a robo-advisor or a broker.

Robo-advisors can offer low-cost investing options for those who are interested in managing their investments themselves.

It is also important to remember that investments are not under the protection of the Federal Deposit Insurance Corporation like a checking and savings account would be. If the stock market drops unexpectedly, you can lose your money. 

Open a Credit Card with Benefits

If you are debt-free and pay your credit cards off at the end of every month, you might want to invest in a card that gives you the perks you are looking for in a card.

This would be especially beneficial if your other cards do not offer benefits at all, or just not the ones you are looking for.

Some credit cards require you to pay an annual fee, but they will usually supplement that fee with travel rewards or cash-back rewards.

The perfect card should be able to save you more money in the long run, even taking into account the cost of maintaining the credit card.

Donate Money or Goods to Charity

If you are well off financially and can’t think of any use for your refund, consider donating to a charity of your choice.

Before choosing an organization, you should ask the charity questions about how they spend the money you are donating and what the organization is doing to change the world.

There are so many charitable organizations that are worth donating to, so don’t be afraid to ask questions about them and how they use the money for good.

Some charities will also accept donations in the form of goods instead of money. By donating goods to a registered charity, you can help them get things they desperately need quickly. 

Fund Your Child’s College Savings

If you are a parent, you might be interested in ways to pay for your child’s college education. Consider putting your tax refund in a 529 college savings plan.

As long as the money is used for education, you won’t be taxed on it. In some states, you might even be eligible for a tax break for your education contributions. 

With a 529 college plan, you can invest your money for added growth. This is a great way to achieve your savings goals for your child’s future college education. You can even set up recurring, automatic contributions as low as fifteen or twenty-five dollars each month. 

Image credit: Karolina Grabowska

The Nuts and Bolts of Obamacare

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The Patient Protection and Affordable Care Act (PPACA) – known as “Obamacare” – was passed into law on March 23, 2010, and its main provisions were recently upheld by the Supreme Court.

The act is the largest and most sweeping healthcare reform ever enacted in the United States and will affect almost every aspect of the industry.

The act contains thousands of provisions that began to be implemented when the bill was passed and will continue to come into law between now and 2020. There are more provisions than can be covered in one article, but here is a summary of the most significant ones, and only those that relate directly to the general public. These provisions are complicated so the descriptions below will be brief.

Healthcare Coverage Provisions

These changes have the most effect on benefits, beneficiaries, exclusions and limitations as they exist in typical modern health plans.

Lifetime benefits. Effective this year, and applying only to new policies, insurance companies can no longer impose lifetime limits on “essential benefits”, like hospital stays.

Dependent coverage. Your children can stay on your health insurance plan up until they turn 26, even if they don’t live with you, aren’t in school, or might be married. This provision is in effect right now.

Dropping coverage. Insurance companies can no longer terminate coverage on patients when they get sick. This is also already in effect.

Preventative care services. Beginning August 1, 2012, all new plans are required to cover certain preventive services like mammograms and colonoscopies that won’t be subject to co-payments, deductibles and co-insurance provisions. Beginning in 2018 this requirement will extend to all existing insurance plans, and will also require check-ups without co-payments.

Pre-existing conditions. As of January 1, 2014, insurance companies will not only be prohibited from turning down customers with pre-existing medical conditions, but they won’t be able to charge higher premiums either. Gender based premium differences will also disappear. The only listed exception to the rule are smokers.

Deductibles. Beginning January 1, 2014, and only on employer sponsored plans, there will be a maximum deductible of $2,000 for single coverage, and $4,000 for other plans.

Subsidies

There are actually several subsidy provisions, but this one is the most sweeping.

Health insurance exchanges. As of January 1, 2014, health insurance exchanges will be set up by the individual states to subsidize insurance premiums for millions of people based on household income as a percentage of the federal poverty level. Insurance premiums will be capped at certain levels based on income relative to the poverty level, with the highest subsidies going to those households earning less than 133% of the poverty level, and the lowest going to those earning up to 400% of it. This is a complex provision, but it appears that the subsidy will come in the form of a refundable tax credit, which means the recipient will get the credit even if they pay no income taxes.

New Taxes

There are many tax changes pursuant to the act, but here are the ones that are most relevant to the largest number of people.

Payroll reporting. For 2012 and beyond, employers must report on your W2 the value of health insurance benefits they provided during the year. There are no apparent tax consequences to this – yet!

Medical deductions for income tax purposes. Currently, there’s a limitation applied to the deductibility of medical costs for income taxes; you must first reduce the amount of your medical expenses by 7.5% of your adjusted gross income and deduct the difference. Beginning January 1, 2014 the 7.5% reduction will rise to 10% of adjusted gross income.

Translation: fewer people will be able to deduct medical expenses in the near future.

Direct taxes. As of January 1, 2013 there will be an additional tax of .9% on earned incomes above $250,000 for married couples filing joint, and $200,000 for singles. The Medicare tax is also being increased. An additional 3.8% Medicare tax will apply on “unearned income, specifically the lesser of net investment income or the amount by which adjusted gross income exceeds $250,000 for married filing joint, or $200,000 for singles.”

“Cadillac insurance plans”. High cost insurance plans—defined as those costing in excess of $27,500 for families and $10,200 for individuals—will have an excise tax imposed on them beginning in 2018. The tax rate: 40%.

Penalties

In addition to new taxes, the bill imposes penalties.

Penalty for non-coverage. As of January 1, 2014 the act will impose an annual penalty on those who don’t have health insurance plans. The penalty will start out as the higher of $95 or 1% of gross income, but rising in 2016 to a minimum of $695 for indivduals and $2,085 for married filing joint, or 2.5% of income. This penalty was a major part of the recent Supreme Court case on the act, and was upheld with the logic that Congress has the authority to “levy the penalty as a tax”, rather than an attempt to force people to get insurance coverage.

Employer penalties. Beginning January 1, 2014, employers with more than 50 employees will be subject to a penalty of $2,000 per employee if the employer does not provide health insurance coverage for full-time employees.

Other provisions

Health insurance for Congress. Beginning in 2014, not only members of Congress but also their employees will be moved out of the Federal Employees Health Benefits Program, and into a plan provided under the act. In effect, Congress will be subject to the same health care plans the rest of us are.

Medicare Part D. By 2020 Medicare Part D for prescription drug coverage will be ended.

There are numerous other provisions that will affect both Medicare and Medicaid that are too complex to discuss here. Due to their complex nature, these provisions has been simplified – this is a summary presentation of the act, not a line-by-line breakdown.

Also keep in mind that the bill is still moving through the system and will be amended as it does. Any of these provisions could be modified, reduced, expanded or even canceled before, during or after implementation.

What are your thoughts about Obamacare?

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