Your Newspaper - Your Health - Get Back to Taxes

Posted on: April 20, 2007

Get Back to Taxes

Now that the annual deadline has come and gone, here are some great ways to improve your financial standing for the next go-round

By Christina Owens
CTW Features

Finding a forgotten $10 bill in your pocket can make a bad day great. Claiming a discarded bill on the street (after presumably wiping it off) can pay for your morning latte for a week. And getting money at any time for doing absolutely nothing is pure serendipity.

But unlike the money on the street, your tax refund check “is not found money,” says Jackie Perlman, senior tax research coordinator for H&R Block, Kansas City, Mo.

No, the unexpected gift glistening on the proverbial April 15-sidewalk is actually no gift at all.

“It’s not money that wasn’t there before. You’ve had it all along,” says Wendy Spizzirri, a financial representative for Northwestern Mutual Financial Network, Crystal Lake, Ill. “When you get a tax refund, it’s really money that the government’s been holding all year when you could have been earning interest on it.”

While taking a long-overdue vacation, remodeling your house or treating yourself to a shopping spree is a common and very tempting use for a tax refund, many tax consultants encourage their clients to do otherwise.

“Most people would like to spend their refund on what they would enjoy,” Perlman says. “But we recommend paying down any debts you might have, or you might want to think about saving it.”

According to H&R Block, a bad credit report can take up to seven years to eradicate after demonstrating your ability to make payments on time. Furthermore, credit card interest is not tax deductible, meaning it’s money out of pocket.

Putting your money toward paying off your credit card bill or student loans is a great start. Few people think, however, to put their tax refund money into a nontaxable savings account.

The biggest mistake people make? “Spending it all and not considering they might need it for something else,” Perlman says.

Finally getting that money that the government has so kindly put aside for you for several months is “a good time to replenish your rainy-day fund, or a good way to catch up on retirement funds,” Spizzirri says.

That rainy day might come in the form of a college fund for the newest addition to your family or an unexpected financial bump in the road.

Spizzirri recommends having less of your paycheck taken out each month. Instead, the money you’d normally receive from the government after tax season could be earning interest in a savings account all year. “If the government just holds it, you’re not earning interest on it,” Spizzirri adds.

“You could put your money into a Roth IRA. A refund just means that they’ve taken too much money from income taxes,” she says. “As long as you leave your money in a Roth IRA until age 59 and a half, you won’t have to pay taxes on it when you pull it out.”

However, if you earn more than $95,000, individually, or $150,000, married, you might not qualify.

But it doesn’t have to be all work and no play. Some tax consultants suggest a formula for your refund to ensure that a portion of your money gets saved, a portion of it gets donated to a tax-deductible organization and that a portion of it can be used at your discretion.

“Some people say one-third, one-third, one-third, but it really depends on the individual situation,” Perlman says.

So if you’re considering saving this year’s refund for that rainy day, think of interest on a savings account as a kind of “found money”: you did absolutely nothing to get it – and just think of it as 365 serendipitous morning lattes.