By now most people are well aware of the recent Tax Cuts and Jobs Act, the most significant U.S. tax reform in decades. Although an in-depth understanding of it is very much a work in progress, it is now critical that each of us begin planning for how these tax changes will affect our overall financial situation. Some major highlights of the recent tax reform include the elimination of personal exemptions; reduced tax rates based on income level; and the elimination of miscellaneous expense deductions. Other key changes in the new tax law which became effective for 2018 (beginning January 1st of this year) include the following:
- An increased Standard Deduction of $12,000 for individual taxpayers ($24,000 for married joint-filers)
- An increased Child Tax Credit of $2,000 per each qualifying child
- Repeal of the Affordable Care Act shared responsibility payment (beginning in January 2019)
With April 17th quickly approaching, the more urgent concern may just be getting yourself organized in time to file last year’s taxes. According to businessinsider.com, the average income tax refund in the U.S. is roughly $2,895 per person, with over $13.1 billion refunded in the state of Pennsylvania alone. While this lump sum naturally creates an excitement for most people, it’s important to understand exactly how you were impacted by overpaying your taxes throughout the previous year. This understanding will also be critical in preparing for the impact of the recent tax reform changes for your 2018 tax return. Listed below are several S.M.A.R.T. money strategies to maximize your refund while planning for the upcoming tax year.
Increase your EMERGENCY SAVINGS FUND
Most financial experts suggest having somewhere between 3 to 6 months of expenses set aside for a rainy day. Although consistent budgeting and healthy spending habits will eventually get you to this number, there is no more advantageous way to fund your savings account than thru your tax refund. Even if you don’t decide to allocate all of your refund toward an emergency savings, dedicating even a portion of it is still a very wise move. Most importantly, be sure to take a look at the ways you can consistently save more money each month by paying out less in taxes throughout the year (i.e. smaller tax refunds).
Pay off HIGH-INTEREST DEBT
Often times eliminating debt can feel like running in quick-sand, especially when you’re trying to save money at the exact same time. Having an emergency savings fund greatly reduces the chance of accumulating future debt but unfortunately does very little in removing debt from the past. Therefore, one of the most effective ways to relieve the burden of carrying high-interest debt is by paying it off in a lump sum from your tax refund. This not only has the potential to improve your credit but should also free up additional cash that would otherwise go toward the high cost of interest. The key to this strategy however is not to go back into a situation of increased debt after eliminating it the first time around. Additionally, it’s important to note that personal interest (i.e. credit cards & auto loans) is generally not deductible and offers no tax benefit whatsoever.
Invest additional funds into a RETIREMENT SAVINGS ACCOUNT
Putting funds aside for retirement could potentially be the most lucrative way to use your tax refund in the long-run. This is largely due to the time value of money concept that a dollar today is worth more than a dollar tomorrow (invested for a return). Additionally, since most retirement savings vehicles offer tax deferred growth, it’s even more important to invest in this manner whereby all gains are reinvested without current taxation. Finally, any funds you contribute toward your retirement savings account could potentially lead to a tax break on next year’s return depending on which type of account you use.
Ultimately, using any combination of the three strategies mentioned above will end up working in your favor. Just remember to also spare a few dollars for something you and your family will gain enjoyment from.
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