10 Smart Uses for Your Tax Refund

Tax refund checkBy Kimberly Lankford, Kiplinger


If you have a refund check coming your way, consider using it to bolster your personal balance sheet. The average refund has been around $3,000 for the past two years. (Most people receive their refund within three weeks of filing their returns.) That's a nice chunk of change. Here are 10 good things you could do with the money.

(But before you get to spending it, here's a thought: If your refund was substantial, consider giving yourself an immediate raise by adjusting your tax withholding to increase your take-home pay. Use our Tax Withholding Calculator to figure out how many allowances you should claim.)


13 PHOTOS
10 Smart Uses for Your Tax Refund
See Gallery
10 Smart Uses for Your Tax Refund

Using your refund to pay off a balance with an 18% interest rate is like earning 18% on your investments -- an incredibly valuable use of the money. And if you pay off your balances, you can afford to close some cards that are now charging high fees. For more information, see Close a Credit-Card Account to Avoid Fees.

Many people had to raid their emergency fund over the past year and had little extra money to restore it. You could use your refund to start rebuilding that fund, which can help you avoid landing in credit card debt if you have an emergency. Keep the money easily accessible in a money-market account or savings account that earns interest. See 7 Strategies to Build an Emergency Fund for more information.

You can contribute up to $5,000 to an IRA for 2012 (or $6,000 if age 50 or older). If your modified adjusted gross income is $125,000 or less if you're single, or $183,000 or less if you're married filing jointly, then you can contribute to a Roth IRA, which lets you withdraw the money tax-free in retirement. If you earn too much for a Roth, you can contribute to a nondeductible traditional IRA, then convert it to a Roth.

Use the extra cash to buy shares in a mutual fund or stock you've been considering -- but may feel is too risky for your IRA or not available in your 401(k) plan. For example, if you want to invest in small-company stocks vetted by a pro, check out a new addition to the Kiplinger 25, the Homestead Small-Company Stock fund, which has a $500 minimum investment. Before you settle on individual stocks, consult our Stock Watch columns, including 16 Stock Picks for Risk-Averse Investors and 6 Tech Stocks for Dividends.

For less than $1,000, you can get coverage for flooding and liability.

Flood-Insurance Policy: If you live in a low- to medium-risk area, it costs about $350 to $600 per year from the National Flood Insurance Program with the maximum $250,000 in dwelling coverage and $100,000 for possessions. Get a price quote at www.floodsmart.gov.

Liability Insurance: Cover your legal expenses if someone is hurt in your home or by your car. It generally costs just $200 to $400 to buy a personal umbrella policy that provides $1 million in coverage over the limits of your auto- and homeowners-insurance policies. See Why You Should Have Umbrella Liability Insurance for more information.

It's always hard to juggle saving for college and retirement. Here's an opportunity to use your extra money to contribute to a 529 account. You'll be able to use the money tax-free for college bills, and you could get a state income tax deduction for your contribution. See 7 Smart Ways to Save for College for details.

You can use the extra money to contribute to a Roth IRA for your child. Your kid is eligible as long as he or she has earned income -- from mowing yards or babysitting, for example. Your child can contribute up to $5,000 or the amount of his or her earned income for the year, whichever is lower, and you can give him the cash to do it. See Open Low-Minimum Roth IRAs for Kids for more information.

Set aside some money for vacation rather than using your credit card and paying interest long after you have returned. Stash your refund in a separate account (see Why You Need Multiple Accounts), then add money automatically every week. You could also set up the account for other expenses -- such as a new car or holiday gifts.

Your refund won't be enough to redo your kitchen or bathroom, but it can pay for some smaller home improvements. Use the extra cash to add a backsplash, paint a room or cabinets, replace your bathroom sink, swap out your faucets, organize a closet, install a programmable thermostat or spruce up your yard. Here are 9 ways to add space and value to your home for $1,000 or less.

If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You'll feel good -- and you'll be rewarded for your good deed when you file your tax return in 2013 (charitable contributions are deductible if you itemize). Use our checklist to make sure the money you give is being used wisely.

HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE





More from Kiplinger

Tax Tips for Real Estate Agents and Brokers

Most real estate agents and brokers receive income in the form of commissions from sales transactions. You're generally not considered an employee under federal tax guidelines, but rather a self-employed sole proprietor, even if you're an agent or broker working for a real estate brokerage firm. This self-employed status allows you to deduct many of the expenses you incur in your real estate sales or property management activities. Careful record keeping and knowing your eligible write-offs are key to getting all of the tax deductions you're entitled to.

Read More

Brought to you by TurboTax.com

What is the Educator Expense Tax Deduction?

The Educator Expense Tax Deduction allows teachers and certain academic administrators to deduct a portion of the costs of technology, supplies, and certain training. Here’s what teachers need to know about taking the Educator Expense Deduction on their tax returns.

Read More

Brought to you by TurboTax.com

Self-Employed Less Than a Year? How to Do Your Taxes

Have you been self-employed less than a year? If you’re just starting out, it’s possible you worked at a job earlier in the tax year before making the switch to self-employment, or you’re working multiple jobs. In this case, you may have more than once source of income you’ll need to report on your income tax return.

Read More

Brought to you by TurboTax.com

Taxes for Grads: Do Scholarships Count as Taxable Income?

Heading off to college to broaden your horizons is exciting, but funding your education via scholarships? That's even better. Scholarships often provide a path to education that might not be feasible otherwise, which is why the Internal Revenue Service (IRS) can be generous in minimizing students' tax obligations. But sometimes scholarship money does count as income, and it’s better to find out now if your scholarship adds to your tax liability than to have a surprise later. Here’s how to decode your scholarship taxation.

Read More

Brought to you by TurboTax.com
Read Full Story
Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.