The average federal tax refund so far this year is $ 2,856 – up from the 2020 average. But instead of using the money for summer vacations, many people who have lost income due to the coronavirus pandemic will have to use their repayments to pay off the mortgage or shop for groceries.
If you’re lucky enough to have the essentials covered, you might be tempted to treat yourself to take out from your favorite restaurant or a nice bottle of wine. Fine. But once you’ve scratched that itch, Consider these ways to put the rest of your tax refund to work for you.
Even if you are now fully employed, there is no guarantee that your hours will not be reduced, your pay reduced, or your job cut down the road. This means it’s more important than ever to have money set aside for emergencies. That way, you won’t have to go into credit card debt or plunder your retirement savings to pay the bills until you get back on your feet.
Aim for six months of living expenses – more if you are the sole supplier to your family. Interest rates are extremely low right now, but you can get higher rates by putting your savings into an online bank account. Look for one with no minimum balance requirement or monthly fees.
While interest rates have come down, most credit cards still charge over 15%. Pay off those unpaid balances and you will get a return on your investment a successful hedge fund manager would envy. If you are able to pay off the entire balance, you will also eliminate a monthly expense, which will give you some breathing space if you lose your job.
If you have a Roth or a Traditional IRA, consider putting some of your repayment money into the account now so you have more money when you retire. If you don’t have an IRA yet, consider getting one. The maximum amount you can contribute to your IRAs in 2021 is $ 6,000 – $ 7,000 if you’re 50 or older – so you can put your entire refund in there if you don’t need it for anything. ‘other.
If you’re not keen on building your own portfolio, consider investing in a target date fund, which will invest in a mix of stocks and bonds, depending on the number of years to retirement.
Food banks have been overwhelmed in recent months, and other nonprofits that provide social services to people in economic distress are also under strain. Donating a portion of your tax refund will help them fulfill their mission, and you’ll also get a modest tax break. In 2021, taxpayers claiming the standard deduction can deduct up to $ 300 in cash contributions to charity. The deduction is per person, so a married couple claiming the standard deduction can deduct up to $ 600 in cash contributions (in 2020, the deduction was limited to $ 300 for married couples).
If you itemize, the amount you can deduct for cash contributions is usually capped at 60% of your adjusted gross income (any cash donation greater than this amount can be carried forward for up to five years and deducted later). However, the limit has been removed for the 2020 and 2021 tax years (although there is still a 100% AGI limit on all charitable contributions). As with the $ 300 deduction for non-details, this tax relief measure does not apply to donations to donor-advised funds and supporting organizations, nor to most cash contributions to residual trusts of charity.
Contributions to a 529 Education Savings Plan grow tax-free, and withdrawals are not taxed if you use them for qualifying expenses, such as tuition and room and board. You can invest all or part of your tax refund – 529 plans usually have very low minimums. Additionally, your state may give you a tax deduction or credit if you invest in your own state plan. If your children are young, you have many years to invest in the plan in order to fund and grow. To find plans, go to Savingforcollege.com.
If you have a high-deductible health insurance plan (deductible of at least $ 1,400 for individual coverage or $ 2,800 for family coverage), you can contribute to a health savings account. An HSA gives you triple tax relief – your contributions are tax deductible (or pre-tax if through your employer), the money grows tax-free, and you can use it duty-free tax to pay medical bills out of pocket regardless of the year (there is no use or loss rule).
The CARES Act has increased the types of expenses eligible for tax-free withdrawals from your HSA. In addition to health insurance deductibles, user fees, prescription drugs, and medical bills that are not covered by your insurance, you can use tax-free withdrawals to pay for most over-the-counter drugs and health products. feminine hygiene. Although health insurance premiums are generally not considered eligible medical expenses, there is an exception if you are using withdrawals to pay COBRA premiums or for other health insurance premiums if you are receiving unemployment benefits. .
Hurricane season is almost here, so if you live in a vulnerable area, consider using your refund money to protect your home. A home generator will keep the lights on and food cold during a power outage. A 6.5 kW portable home generator costs about $ 800 to $ 1,000. You can also use the money to pay someone to cut your trees, which will help protect your home from some of the more common types of storm damage.
If the COVID-19 pandemic is forcing you to work from home, you are probably already well aware of the shortcomings of your home office. Use your refund to purchase a standing desk – the Uplift V2 can be customized for a wide range of heights and costs around $ 550. Is your back acting? Maybe you need a new chair. The Alera Elusion Mesh mid-back swivel / recliner chair, which costs around $ 150, features a contoured seat pad designed to relieve pressure on your legs.