Roadmap to Spending Tax Refund

How to best use your IRS Refund?

This 3 step roadmap to help you decide how to use your tax return.

Below are a series of questions to ask yourself...

Step 1: Emergency Funds

How big is your emergency fund?…(BOTH personal & business emergency fund)

0-2 months = Use your tax refund here

3-5 months = move to step 2

6+ months = move to step 2

(more details at the bottom of email)

Step 2: Debts

Do you have any personal or business debts?

Yes (high interest credit cards) = Use your tax refund here

Yes (Mortgage) = Depends on interest rate but likely you can move to Step 3

Yes (Student loans) = Depends on your specific type of loan, some should not be paid faster due to forgiveness programs

Yes (business debts) = Depends on interest rate, but if the rate is low and since it is tax deductible, likely move to Step 3

No Debts = Move to Step 3

Step 3: Income

In 2022, did you make more than $129,000 (single) or $204,000 (married)?

Income BELOW $129K/$204K = Open a ROTH IRA & invest your Tax Refund there

Income ABOVE $129K/$204K = Open a investment account and invest your tax refund there (OR Backdoor ROTH IRA...rules are tricky here...consult a financial professional)

This roadmap is oversimplified...

More Info for Step 1:

In my opinion, an emergency fund is a higher priority than paying down debts.  If you have a 3 month emergency fund, typically it is recommended to increase that higher to 6 months.  

However, if you have HIGH interest credit card debts.  It might make more sense to pay that down with the tax return instead of increasing your emergency fund.  

Thus, if you have 3 months, you can review step 2 to help give you the answer.  

More info for Step 2:

The 2nd step is crucial because all debts should NOT be treated equally.  

For example, some debts have tax advantages, some provide business advantages, some student loans have forgiveness opportunities, etc. 

In my opinion, not everyone should hurry to pay off a debt with your tax refund.  Also, the amount of interest rate is an important consideration.  

The higher the interest rate, the more important it is to get rid of the debt.  The lower the interest rate the greater the chance that perhaps there are advantages to using the tax refund to invest in your future instead of paying off the debt faster.  

These are the small decisions that we can help you make a big impact on your finances.  

Need help getting your Taxes or Finances organized?

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Schedule your consultation TODAY!!

Best

Pat

Disclaimer:  This is meant to be educational and not advice for your specific tax return situation.  There are many factors to be considered before allocating your money and you should speak with a qualified tax or financial professional.