How can I make the most of my tax refund this year?



The Internal Revenue Service recently announced that tax refunds for 2005 are averaging more than $2,400. Advertisers are already on the prowl hoping you will spend this “free money” at their businesses. There is nothing wrong with making needed purchases, but if you are expecting a refund this year, here are a few other ideas to consider:

If you haven’t already filed, and your household income is less than $37,000, see if there is a Volunteer Income Tax Assistance site near you. This IRS program provides free tax preparation and electronic filing for qualifying households. Taxpayers can dial 2-1-1 (no other numbers are necessary) from anywhere in the state to schedule an appointment. Beware of tax refund anticipation loans. These loans often include significant fees and charges. If you file electronically and choose a direct deposit for your refund, it will only take two or three weeks to get your money. The effective annual interest rate for getting your money via a refund anticipation loan can easily be more than 500 percent. Use the refund to make sure any past due expenses are paid. Late fees and other charges can take a bite out of your budget. Set aside at least some of your refund as an emergency fund. Unexpected expenses can derail the best prepared budgets or spending plans. Having a reserve fund in an easily accessible savings account can smooth out budgeting bumps such as doctor visits or car repairs. Use your refund to pay down credit card debt. Consider a family paying $320 per month on $8,000 in credit card debt at an average interest rate of 21 percent. Using $600 of the refund to make a one-time payment on the credit cards would save $428 in interest costs and help the family become debt free four months sooner. Use part of the refund to pay down a home mortgage. If $1,200 was applied as a one-time extra principal payment on a $120,000 balance with 15 years remaining at 6 percent annual interest, the homeowners would save $1,711 in interest and cut three months off their repayment time. Save for your toddler’s college education. Depositing $900 in an account earning 5.5 percent will grow to $2,165 in 16 years, even if no additional deposits are made. Consider a UESP 529 trust (Utah Education Savings Plan) if you anticipate later contributions that could then be deductible on future tax returns. Boost your retirement fund. If you are 35 years old, placing $1,000 in a fund at a 6 percent growth rate will provide more than $6,000 for retirement. Consumers interested in calculating financial impacts for their specific situations will benefit from the new online program, PowerPay. Go to www.extension.usu.edu/finance and click on the PowerPay icon. Users can build debt elimination plans and see the difference an additional debt payment from their tax refund will make. The site also features savings calculators to help taxpayers determine a wise investment for their refund.

Posted on 16 Feb 2006

Dean Miner
County Director, Agriculture Agent, Utah County

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