How you should rethink your tax refund this year

Now that we are in the midst of tax season, members of the Finance Collective are here to give you tips and tricks on how best to take care of yours taxes this year. This week's tidbit of advice comes from Everything Finance and is about thinking about your tax refund in a new way and putting it to good use:

RETHINK IT
When you receive a significant tax refund, it can be easy to think of it as a bonus or free money, which is likely why so many opt to spend it on something extraneous. Instead of running out and spending it as soon as you receive a check in the mail, stop and take the time to really think about what that money means.

It's not extra money the government is merely giving you. It really means you gave (or the government kept) more of your hard-earned money than you needed to. Think about the fact that your refund is money you worked hard for, like another paycheck. By doing so, you might be more cautious with what you choose to spend it on.

PUT IT AWAY
Out of sight, out of mind, couldn't be a truer statement. If you choose to put your refund right into your checking account, you make it all too easy to spend it. Opt to deposit your tax refund directly into an investment or savings account that isn't easily reachable. By directly depositing it, you won't have an opportunity to touch it or spend it in the first place. Moreover, depending on the savings account, you might not have access to it once it's deposited, which is a surefire way to make sure you don't waste it." -Everything Finance

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"In the past I would typically contribute $1,000 and then direct my savings towards my Roth IRA. Once I maxed out my Roth IRA last year, which is $5,500 annually, I decided to increase my 401K contributions. Here's why:

-It's automatic; a 401K will automatically be withdrawn for every paycheck without testing your will power of getting paid, transferring money to a brokerage account and choosing your investments.

-It is not taxed yet so I can contribute more of my money and will be taxed in the future. The beauty of having both a 401K and a Roth IRA is that you have one account that's already been taxed and other that hasn't so your future retirement has already been partially taxed.

-401K contributions are tax deductible. The amount invested will be deducted from your gross income.

Not only did I save more I also am going to be in a lower tax bracket than 2015 even though I made more!" -Super Millennial

"With technology, the ability to create your own business is endless whether you are a photographer, coder, model, graphic designer, dancer, tutor, etc... the opportunities are endless. You are a self-starter and a go-getter and live by your craft but you don't often understand the financial and tax implications behind it. 

You want to just concentrate on what you are good at and before you even realize it the money is coming in, fast and furious. Now the last thing you want to think about is taxes and cash flow plans etc. But you have no choice. So what are the basics?

Lets start with a 1099, which is a tax document for miscellaneous income; this is where all of your wages for freelancing will be documented for the year, just like a W2 which you may be familiar with. But unlike a W2, no tax deductions will be taken upfront from your wages. The benefit of the 1099 is that you have a little bit more lead room when it comes to planning for your taxes as well as options. #letsgetcreative

Option: Set up your own company, and absorb the 1099's through that company, instead of your individual name." -Orca Financial

"1. Get organized: Use this time to take inventory of your financial situation and see what you are succeeding with and what you are struggling with. The more you know about your finances, the easier it is to improve them.


2. Do not waste your refund: Resist the urge to blow your tax refund on frivolous items. Use the money that you get back from the IRS in a way that will set you up for future success, whether that means investing it or having it contribute to your emergency fund."

-The Funny Financial Planner

RETHINK IT

"When you receive a significant tax refund, it can be easy to think of it as a bonus or free money, which is likely why so many opt to spend it on something extraneous. Instead of running out and spending it as soon as you receive a check in the mail, stop and take the time to really think about what that money means.

It’s not extra money the government is merely giving you. It really means you gave (or the government kept) more of your hard-earned money than you needed to. Think about the fact that your refund is money you worked hard for, like another paycheck. By doing so, you might be more cautious with what you choose to spend it on.

PUT IT AWAY

Out of sight, out of mind, couldn’t be a truer statement. If you choose to put your refund right into your checking account, you make it all too easy to spend it. Opt to deposit your tax refund directly into an investment or savings account that isn’t easily reachable. By directly depositing it, you won’t have an opportunity to touch it or spend it in the first place. Moreover, depending on the savings account, you might not have access to it once it’s deposited, which is a surefire way to make sure you don’t waste it." -Everything Finance

"Use It As a Down Payment on a Home

If you’re planning on buying a house, you may have to come up with a big down payment depending on the market in your area. Your tax refund can help ease that financial burden or even jumpstart your house down payment fund and motivate you to deposit more each month.

When you buy a house, it’s best to put at least 20% down in order to avoid private mortgage insurance (PMI) which can add up each year.

Home Repairs

Home repairs can be expensive and add up quickly. But upgrades and repairs can make your home a more comfortable place to live and even increase its value.

If you’ve been meaning to renovate your home or repair something that has been on your to-do list for a while, your tax refund can help so you don’t have to use your credit card or take out a loan." -My Debt Epiphany

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