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All Contents © 2020The Kiplinger Washington Editors
By the editors of Kiplinger's Personal Finance
| April 8, 2016
If you’re like the majority of taxpayers, you’ll likely get a refund this spring, and chances are it will be a nice chunk of change. The average refund these days is about $3,000. Think of all the things you can do with that money. We’ve identified 10 enticing but wasteful ways to blow your refund; consider our money-smart alternatives instead.
And if your refund was substantial, consider giving yourself an immediate raise throughout 2016 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.
Perhaps you’ve been dreaming of buying a boat so you can spend your weekends on the lake. Now you can thanks to your big refund, which will make a nice down payment. You’ll get a loan to cover the rest of the $25,000 price tag on the boat of your dreams.
The smarter way to spend your tax refund: Before you take on more debt, pay off the debt you already have. Using your refund to pay off a credit-card balance with an 18% interest rate is like earning 18% on your investments—an incredibly valuable use of the money. See Proven Tactics to Overcome Big Debts for guidance on paying off debt quickly.
You’ve wanted a Prada tote and some Jimmy Choo flip-flops, and now you can finally afford them with your $3,000 refund. But what happens if your car breaks down, you have to have wisdom teeth pulled or you owe money to the IRS next year?
The smarter way to spend your tax refund: Rather than head to the mall with your refund, go to the bank to open an interest-bearing savings account to start an emergency fund—or build upon an emergency fund you already have. Your goal is to save enough to cover at least three to six months’ worth of expenses. See 7 Strategies to Build an Emergency Fund for more information.
What’s better than $3,000? Well, $6,000, of course. If you’re feeling lucky, you could head to the casino to double down at the blackjack table.
The smarter way to spend your tax refund: Rather than gamble away your money, put it to work for you in a retirement account. For instance, you can contribute up to $5,500 to a Roth IRA for 2016 (or $6,500 if 50 or older)—and withdraw the money tax-free in retirement. You can contribute the full $5,500 as long as your income falls below $117,000 if you're single, and $184,000 if you're married and filing a joint tax return. The contribution limit is phased out incrementally if you make between $117,000 and $132,000 (single) or $184,000 and $194,000 (married filing jointly).
SEE ALSO: Retirement Plan Contribution Limits for 2016
A friend of a friend told you about a guaranteed moneymaking opportunity. You’ve never had the cash to cover the cost of the daylong seminar to get the details—until now.
The smarter way to spend your tax refund: Rather than spend your refund on what could be nothing more than a scam, use the money to prosper by taking a continuing education course that can improve your career prospects and earnings potential. You might be able to claim the Lifetime Learning tax credit (worth 20% of the first $10,000 of qualified education expenses) for your tuition, even if you're not enrolled in a degree program. See 6 Tax Breaks for College Costs for details.
Or, you could spend about $500 for a few sessions with a career coach.
Ahh, now you’re on the right track, spending your refund on something practical, such as insurance. A mortgage life insurance policy may seem like a good use of your refund because it will pay off your home loan if you die. But these policies tend to be expensive and don’t give your heirs the flexibility to use the money for anything else.
The smarter way to spend your tax refund: Rather than spend your money on mortgage life insurance or any other policy you don’t need, fill the gaps in the insurance you already have:
Liability insurance. Cover your legal expenses if someone is hurt in your home or by your car. It generally costs just $175 to $300 in annual premiums to buy a personal umbrella policy that provides $1 million in coverage over the limits of your auto- and homeowners-insurance policies. See How to Add a Personal Liability Umbrella Policy for more information.
Home insurance. For about $50, you can add $10,000 to $20,000 in sewage-backup coverage—which isn't part of a standard homeowners policy.
Or, for storm season, consider buying a home generator: A 6.5-kilowatt portable generator costs about $800 to $1,000. You also can pay to trim your trees to help protect against some of the most common types of storm damage.
SEE ALSO: Upgrade Your Home and Insurance Policy Before Spring Storms Hit
That first birthday is an important one, so you want it to be memorable for little Jimmy. You could use your $3,000 refund to hire clowns, put a merry-go-round in the yard and have pony rides.
The smarter way to spend your tax refund: Recognizing that little Jimmy won’t ever remember his first birthday, stash the refund in a college-savings account for him instead. It’s truly a gift that will keep on giving. By contributing to a 529 account, you’ll be able to let the money grow tax-free for college bills, and you could get a state income-tax deduction for your contribution. See 529 Plan FAQs for details.
Perhaps you didn’t get the big-screen TV of your dreams for Christmas. You could treat yourself to a new HDTV with that big refund. Alas, you’d be overspending, as TVs hit their lowest prices of the year around Black Friday in November and late January/early February.
The smarter way to spend your tax refund: Rather than buying what you want now, buy your friends and family what they want by funding this year’s holiday giving with cash from your refund.
To learn more about what the best time to buy big screens, check out Best Times to Buy Big-Ticket Items.
For $3,000 or so, you could get an above-ground pool and have fun in the sun all summer long. Problem is, you’ll likely need to add more liability coverage to your homeowners-insurance policy. And pools typically don’t add value to a home, present an ongoing liability and might even lower the value of your property in the eyes of some home buyers.
The smarter way to spend your tax refund: Increase the value of your home by upgrading your front door, fixing up the fireplaces or taking on one of our 6 Home Projects That Save Energy and Money.
Live the high life! You could use your refund to rent a big black car, head to the swankiest restaurant in town and order the priciest meal and bottle of champagne on the menu.
The smarter way to spend your tax refund: Make a charitable contribution to help those in need. You’ll feel good -- and you’ll be rewarded for your good deed when you file your tax return for 2016 (charitable contributions are deductible if you itemize). See Smarter Ways to Give to Charity for strategies that will allow your giving to have the maximum impact.
You can also use your refund to help accumulate enough money to open up a donor-advised fund. Most funds require a minimum of $5,000 to $10,000. You can claim a tax deduction in the year you make a contribution to the fund, but you have an almost unlimited amount of time to decide which charities to support.
You can’t think of a good way to spend your money, so you could just stuff it under your mattress for safekeeping.
The smarter way to spend your tax refund: Unsure what to do with your big refund? Invest in a session with a financial planner to make sure you're on track to reach your financial goals. A fee-only financial planner generally charges $100 to $300 per hour (or $500 to $1,000 for a one-time consultation to set you on the right path). It's particularly helpful to get the planner to review your situation if you’ve recently had or are anticipating a major life change. For help choosing an adviser, see What to Ask a Financial Adviser.