(COLUMBUS) The average tax refund has increased by approximately 10 percent in 2010 as more Americans have qualified for tax breaks under the economic stimulus acts.
If you’re one of the lucky ones receiving a refund, CPAs urge you to think carefully before spending it. It’s a good time to review your entire financial situation and make adjustments to keep you on track for the rest of the year.
Ohio Society of CPAs member Angi McClish, CPA, offers these suggestions for tuning up your finances:
Update your budget. Before you spend a penny of your refund, review your monthly expenses so you know exactly how much is going out the door every month. Include recent changes and an amount for education and retirement savings. It’s much easier to commit to putting that money away consistently if you budget for it as an expense.
Build your cash reserves. Use this opportunity to increase your financial emergency fund. CPAs recommend maintaining a cash reserve that will cover three to six months of expenses in the event of a job loss or other financial crisis.
Save for retirement. Invest a portion of your refund in a retirement savings plan such as an Income Retirement Account (IRA). You generally can take either a deduction or a credit on your tax return for a traditional IRA contribution. Plus you won’t be taxed on any interest you earn until you withdraw the money at age 59½ or later With a Roth IRA, you invest money after tax and it grows tax free. Talk to your CPA about the best option for your tax situation.
Decrease Debt. One of the best ways to save money and improve your credit rating is to pay off debt such as high-interest credit cards. In the future, commit to never using your credit cards unless you can pay the bill in full when it arrives.
Improve your home’s value. If you own your home and plan to live in it for at least five years, consider making certain improvements that will increase its market value. In 2010, homeowners who make certain energy efficiency improvements may claim a tax credit of 30 percent of the total cost of the improvement, up to $1,500. Qualifying expenses certain high-efficiency heating and air conditioning systems, water heaters, and stoves that burn biomass fuels. For more information, read the IRS Fact Sheet, Energy Provisions of the American Recovery and Reinvestment Act of 2009.
Have Some Fun. If you’re meeting monthly expenses and have paid down your short-term debt, it’s okay to spend a portion on something fun. A good rule of thumb is to spend no more than 10 percent of your total refund and don’t use it as a down payment to finance something that will increase your debt.
Change your withholding. Many people think of their tax refund as a bonus but it’s really an interest-free loan you give the government for an entire year. If you’re getting a significant refund, consider changing your withholding status so that you have more money in each paycheck to put toward your long-term financial goals.
To view Angi’s video on Tuning Up Your Finances, visit The Ohio Society’s YouTube channel.
For additional smart money tips, visit FinancialFitnessOhio.com.
The Ohio Society of CPAs, established in 1908, represents more than 23,000 CPAs in business, education, government and public accounting. The Ohio Society’s members not only meet statutory and regulatory requirements as CPAs, but also embrace the highest standards of professional and ethical performance. This is achieved through ongoing professional education, comprehensive quality review and compliance with a strict Code of Professional Conduct.
If you’re one of the lucky ones receiving a refund, CPAs urge you to think carefully before spending it. It’s a good time to review your entire financial situation and make adjustments to keep you on track for the rest of the year.
Ohio Society of CPAs member Angi McClish, CPA, offers these suggestions for tuning up your finances:
Update your budget. Before you spend a penny of your refund, review your monthly expenses so you know exactly how much is going out the door every month. Include recent changes and an amount for education and retirement savings. It’s much easier to commit to putting that money away consistently if you budget for it as an expense.
Build your cash reserves. Use this opportunity to increase your financial emergency fund. CPAs recommend maintaining a cash reserve that will cover three to six months of expenses in the event of a job loss or other financial crisis.
Save for retirement. Invest a portion of your refund in a retirement savings plan such as an Income Retirement Account (IRA). You generally can take either a deduction or a credit on your tax return for a traditional IRA contribution. Plus you won’t be taxed on any interest you earn until you withdraw the money at age 59½ or later With a Roth IRA, you invest money after tax and it grows tax free. Talk to your CPA about the best option for your tax situation.
Decrease Debt. One of the best ways to save money and improve your credit rating is to pay off debt such as high-interest credit cards. In the future, commit to never using your credit cards unless you can pay the bill in full when it arrives.
Improve your home’s value. If you own your home and plan to live in it for at least five years, consider making certain improvements that will increase its market value. In 2010, homeowners who make certain energy efficiency improvements may claim a tax credit of 30 percent of the total cost of the improvement, up to $1,500. Qualifying expenses certain high-efficiency heating and air conditioning systems, water heaters, and stoves that burn biomass fuels. For more information, read the IRS Fact Sheet, Energy Provisions of the American Recovery and Reinvestment Act of 2009.
Have Some Fun. If you’re meeting monthly expenses and have paid down your short-term debt, it’s okay to spend a portion on something fun. A good rule of thumb is to spend no more than 10 percent of your total refund and don’t use it as a down payment to finance something that will increase your debt.
Change your withholding. Many people think of their tax refund as a bonus but it’s really an interest-free loan you give the government for an entire year. If you’re getting a significant refund, consider changing your withholding status so that you have more money in each paycheck to put toward your long-term financial goals.
To view Angi’s video on Tuning Up Your Finances, visit The Ohio Society’s YouTube channel.
For additional smart money tips, visit FinancialFitnessOhio.com.
The Ohio Society of CPAs, established in 1908, represents more than 23,000 CPAs in business, education, government and public accounting. The Ohio Society’s members not only meet statutory and regulatory requirements as CPAs, but also embrace the highest standards of professional and ethical performance. This is achieved through ongoing professional education, comprehensive quality review and compliance with a strict Code of Professional Conduct.