For many Americans, a tax refund represents additional money to supplement their regular income. But, before you start making big plans or purchases with the money, consider seeing it as an opportunity to improve your financial health.

Start With Savings

Accurate Allocations: A substantial tax refund might feel like a windfall, but it’s really just the IRS returning the money you overpaid. If you don’t want to give the IRS what is essentially an interest-free loan each year, consider adjusting the amount your employer is withholding from your pay to more closely align with your anticipated tax liability.

The stark difference between individuals with regard to financial security often boils down to one key factor: savings. If you don’t have adequate savings, even the smallest unexpected expense can derail you. Typically, $500 of emergency savings is enough to cover relatively small surprise expenses, such as a blown tire. However, you should ultimately aim to have enough saved to cover three to six months of living expenses.

Despite the desire to save, many people struggle with follow-through and feel trapped by their current financial situation, unable to move forward. Fortunately, the simplest way to kickstart your savings and move closer to your financial goals might be through your tax refund.

Seize the opportunity to create some financial padding for yourself. Save at least a portion of your tax refund to start or increase your emergency fund, using it only if truly necessary. Successfully saving a portion of your refund can bolster your financial health and help you feel confident enough to start saving for long-term goals, such as a down payment for a home.

Manage Your Refund

Filing your tax return online and having your refund directly deposited can streamline your refund process, putting the cash at your disposal faster. It also allows the IRS to divide your refund between up to three financial accounts at your direction.

In addition to giving you access to your refund sooner, this method can help you make more responsible purchases with the funds. To set firm budgetary limits for yourself and make tracking spending easier, consider allocating your refund toward:

• Reducing debt, especially high-interest debt, to relieve financial pressure
• Bolstering your emergency fund so you have a cushion for unexpected expenses
• Enhancing your savings for specific goals, like a vacation, retirement, or weekend fun
• Investing in home improvements with a sound return on investment, or ROI, to increase the comfort or enjoyment of your home
• Contributing more toward your retirement savings, leveraging the power of compound interest

Avoid Refund Loans

Tax refund anticipation loans, though tempting for their promise of immediate access to funds, are high-cost loans taken out against your expected refund amount. Tax preparers sometimes offer this loan as a selling point for their business, positioning it as allowing you to get your refund early. In truth, though, you are borrowing money from the tax preparer, and your actual tax refund then repays your debt.

This distinction is important to understand because tax refund loans often come with sizable fees and charges that lower your refund amount. Essentially, you’re trading a portion of your refund for the convenience of having the remaining amount instantly available to you.

Though exceptions exist, you can generally expect to receive your refund within 21 days when you file your taxes electronically – a small wait to receive your full refund. You can check your refund status using the IRS’s free online tool.

Guard Against Tax Scams

Vigilance is crucial during tax season (January through April), as the abundant flow of sensitive personal and financial information presents a prime opportunity for fraudsters. Identity theft and phishing attempts are common, and you should be wary of well-known scams targeting taxpayers, such as:

• Phone calls from someone claiming to be from the IRS and demanding immediate payment of owed taxes under the threat of penalty or legal consequences. The IRS will never request payment in the form of gift cards, cashier’s checks, or wire transfers, and they will never try to intimidate you on the phone.
• Unsolicited emails that appear to be from the IRS and request you verify your personal or account information, which are most frequently identity theft attempts.
• Unexpected emails or messages regarding “tax transcripts” that contain attachments or links with malicious software designed to steal personal data.

For added protection, don’t respond to or interact with unusual or unsolicited communications that demand payment or personal information. Likewise, do not engage with parties that use aggression or manipulation to force action.

Realize Your Refund’s Potential

Whether you use it to save for emergencies or pay down high-interest debt, your annual tax refund can be a valuable tool to put your finances on a more solid footing. Make sure you’re getting the most from your tax refund by following the strategies outlined above, and reach out to us to see how we can turn your tax refund into a step toward lasting financial health.