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During the 2015 tax filing season, the average tax refund was $2,797 - that's enough money to buy five Apple Watches, treat yourself to a Caribbean cruise or snag a couple of VIP tickets to the Coachella music festival.

The urge to splurge your tax refund on something "fun," like tickets to a music festival, will probably be strong once you receive your check. However, it's important that you take a good look at your finances before your blow your tax refund on something nonessential. Otherwise, you might regret not using your refund for more important goals, such as building up your savings or getting out of debt.

How to Spend Your Tax Refund: Prioritize

First and foremost, set a goal and action plan for your tax refund. If you let it absorb into your checking account, you'll end up spending it on a number of minor expenses - from shopping to coffee - that don't really matter. Pretty soon, you'll have no proof that you ever received a check for several hundred or thousand dollars from the government. Instead, you can use your tax refund to address problem areas or opportunities in your financial life. Here, in order of most to least important, is where you should put your money.

1. Pay down your debts.

Even the smallest tax refund can help pay a portion of outstanding debt, like a mortgage, car payment, credit card balance or student loan, giving your principal power over high interest. If debt is your biggest financial worry, you should consider devoting your entire refund toward paying it off, since a four digit refund can help make a lot of progress in several of the above examples.

2. Pad your emergency fund.

Experts say that everyone should have three to six months' worth of money saved up to cover emergency expenses but that's not the case for most Americans. In fact, GOBankingRates recently found that 62 percent of Americans have under $1,000 in savings.

Without an emergency fund, you're vulnerable to all sorts of unexpected occurrences - unemployment, a medical emergency, a hefty car expense, just to name a few. Build up a $1,000 cushion by depositing your entire tax refund into a savings or sub-savings account for emergencies.

3. Make tax-free contributions.

If you've decided to save your tax refund do it tax-free. Go beyond the rainy day fund, and look into investing the money in a tax deferred Individual Retirement Account (IRA) or 401k.

Many tax refund recipients mistake their new gains as "free money" and forget that it's money they've already earned. Putting it toward your retirement means you will be spending it on yourself - eventually.

4. Start investing.

Your tax refund can also act as a foundation for other investments, even if your check is less than $500. There are plenty of small investment options out there including individual stocks, mutual funds and dividend reinvestment plans (DRIPs) that you can try with your tax refund.

Don't forget that a three to four figure tax refund is more than enough to satisfy the minimum opening deposit requirements for many certificate of deposit (CD), money market and high yield savings accounts.

5. Tackle some self improvement.

One way to spend your tax refund selfishly without wasting the money is to invest it in yourself. This could mean anything from taking a class at your local community college to getting certified for a skill to put on your resume. The payoff is that you'll get to experience something that enriches your life and advances your career down the line.

6. Consider giving to charity.

Your tax refund might be the only chance you get to include philanthropy in your budget. Not only is it personally fulfilling to give money to others in need, but acting selflessly is proven to make you happier and physically healthier, too. Plus, if you donate money to a qualified charitable organization, you could potentially reduce your taxable income and lower your tax bill for next year.

If donating to charity has been a desire of yours for a while but you're undecided on what cause or organization to donate to, set your refund money aside in a separate savings account until you've made a decision on how you'd like to divide the funds.

7. Spend some of it on yourself.

All of this doesn't mean it's wrong to spend the money on yourself. If you've managed to meet all of the above financial needs with money left to spare, you deserve to treat yourself to something you've always wanted - think of it as a present, from you to you, for working hard all year long. What's more, splurging a little has been proven to actually help you save money.

Make Use of These Tax Refund Resources

Keep in mind that if you're receiving an unusually large tax refund, you might be withholding too much on your W-4 and the experts are divided as to whether that's smart.

The good news is that you can alter your income withholding at any time by filling out a new W-4 form. You can also estimate what kind of a refund (if any) you're likely to receive for 2016 by using a W-4 salary calculator. Take a copy of your 2015 tax return, a recent pay stub, and play with the numbers to gauge how much you're comfortable withholding.


Tax season usually evokes feelings of dread, anxiety and stress, but there is one thing that gets people excited: the arrival of their tax refund.

If you file your taxes every year you probably already know what a tax refund is: It's a refund you get from the IRS if you overpaid in taxes that year. According to the Treasury Inspector General for Tax Administration disclosure, the IRS received more than 137 million tax returns during the 2015 tax filing season and issued more than 100 million refunds totaling around $270 billion. The average tax refund was $2,701, a slight increase from the year before.

Two thousand dollars can go a long way, especially if you're looking to improve your finances. According to the National Retail Federation's annual Tax Return Survey, 39.1 percent of consumers had planned to pay down debt with their tax refund in 2015; 46.9. percent planned to put it in savings.

How Americans Planned to Spend
Their 2015 Tax Refund

Note: Survey respondents were asked, "What do you plan to spend your refund on? Check all that apply". The sum of the % totals may be greater than 100% because the respondents can select more than one answer.

When you get your next tax refund, you might choose to use it to build your savings or pay off debt. But how do you decide between putting the money in a savings account and using it to pay off loans and bills?

Below are some tips to help you decide on how you should spend your tax refund.


When to Use Your Tax Refund to Pay Off Debt

Paying off debt can feel like you're trying to lift a huge weight off your shoulders. Typically, getting out of debt is a long process that requires careful planning and budgeting as well as patience. So, it's understandable why you might want to use your tax refund to pay off your credit card debt, your mortgage loan, car loan or even student loans.

But, you might have a little nagging voice in your head telling you to save your tax refund instead. Here are three reasons to prioritize paying off debt over saving money when you receive your tax refund:

  • You can pay off a bill ASAP. Depending on the size of your tax refund and how much debt you have, you might be able to go ahead and finish off some of the smaller bills, such as credit card or utility bills.

  • You can buff up your debt snowball. With that extra money, you can go ahead and build up your debt snowball to pay off the rest of your debts even faster.

  • You can improve your cash flow. With a debt or two removed, you can then give yourself a bit of wiggle room in your budget and start saving more money. So if an emergency happens, you'd have a bit of cash to spare if you need to use it.

It might seem like a no brainer to use your tax refund to pay off your debt first instead of saving it. After all, it's extremely difficult to save money if you have a ton of debt holding you down. Still, there are times when you should opt to put your tax refund in a savings account instead.

When to Use Your Tax Refund to Build Your Savings

For some people, going into full debt elimination mode without having some sort of financial cushion might not be the best strategy. When a financial emergency or unexpected expense arises you might need money to cover that expense. But, if you've been focused solely on paying off your debt, you might not have enough money in your savings forcing you to take out another loan or credit card, both of which just add more to your debt load.

If you don't have a financial safety net consider taking your tax refund and tucking it away into a high interest savings account. That way, you'll have easy access to your money in case an emergency happens. Plus, your balance will continue to grow thanks to the savings account's high interest rate.

With that said, if you're convinced that you need to use your tax refund to pay off debt, there's a way you can make payments and save money at the same time; just allocate a portion of your tax refund to go toward your savings account and a portion to go toward your debt payments.

How much of your tax refund should you put in your savings? That depends on you and your situation:

  • If it's just you, and you don't have any dependents: Your total savings account balance should be enough to cover at least one month of bills. Whether it's $200 or $2,000, use a portion - or all - of your tax refund to bring your savings balance to that amount. Should you lose your job, you'll have a few weeks to get something together going forward without having to put bills on your credit cards.

  • If you have a family: Talk to your spouse about how much of your tax refund you want to put toward your savings. Perhaps the two of you feel that having a couple months of expenses gives you enough breathing room should one of you lose a job.

Whatever you decide, you can't go wrong with using your tax refund to build savings or get out of debt. Just remember this: Don't try to invest money intended for short term savings. Investing in stocks can be quite volatile. Instead, keep it somewhere safe and easy to access.

Sydney Champion contributed to the reporting for this article


Tax season is here, and with it comes all the usual issues of paperwork and confusion. But this year might be especially difficult as there are several new developments on the tax front.

With that said, here are 11 things you need to know when filing your tax return this year.

1. Tax Accountants Get Swamped Closer to Tax Season

The earlier you start collecting documents and figuring out how you are going to file your taxes, the better. Many accountants might find themselves too busy to help procrastinators who wait until April to start the process.

"There are literally hundreds of changes, extensions and deletions that we will consider this year when preparing returns for our clients," said accountant William Rivero of accounting firm Correia, Rivero &amq; LeFebvre. "Because of these changes we are requesting our clients try to have their information to us no later than March 21, 2016."

Early preparation for filing helps you avoid everything from document issues to accountant time constraints.

2. Tax Filing Methods Are Evolving

The way that people actually file their taxes is evolving, with many opting for tax preparation software over filing by hand.

For example, TurboTax offers free and affordable services to help you fill out your tax returns. However, this software can cost as much as $79.99 if you're self employed or a small business owner.

The IRS offers Free File Software, but it's only available to those whose annual income is below $62,000. If your income is above $62,000, the IRS offers Free File Fillable Forms, but you must know how to do your taxes yourself.

There are distinct advantages and disadvantages to various tax filing methods, and taxpayers should spend a bit of time deciding on the method that is right for them.

3. The IRS Is Trying to Prevent Identity Theft

With new changes in technology, the IRS is increasingly concerned about tax filing related identity theft. There have been many stories in the news in recent years about criminals stealing people's identities and then using those identities to file false tax returns. But during the 2016 tax season, new security measures are expected to prevent this.

According to a statement on its website, the IRS is partnering with state tax administrators and tax leaders to protect consumers against identity theft refund fraud by using more than 20 new data elements on tax returns this year.

"We are breaking new ground in the battle against identity theft," said IRS Commissioner John Koskinen in a statement. "Taxpayers will have more protection than ever when they file their tax returns."

4. But These Safety Precautions Could Make the Process Longer

CBS MoneyWatch reports, however, that this effort against identity theft and fraud will mean "more stringent passwords to access tax software" and security questions for taxpayers. There will also be a new feature that will lock users out after too many failed log in attempts. Although these data elements should detect possible identity theft refund fraud, it also means tax filing might be a longer process.

And as with all changes, these new security measures might encounter some hiccups and complications the first time through. So, make sure you give yourself plenty of time to get through the tax filing process this year.

5. IRS Customer Service Levels Might Be Low — Again

In November 2015, Koskinen warned that customer service will be even worse during the 2016 tax season, reports the Washington Post.

During the 2015 tax season, customer service levels were low at only 37.6 percent, reports Forbes. Out of approximately 83.2 million taxpayers who contacted the IRS via its Customer Account Services number, only about 8.3 million were connected to a live person. And, the average wait time to talk to a person was 23.5 minutes.

But, USA Today reports that during a January 2016 media briefing, Koskinen said there might be shorter telephone waiting times this year. "We expect the level of service on the phone will be better than last year," he said. "Our goal would clearly be to have [waiting times] under 20 minutes."

6. Audits Are Fewer But Just As Unpleasant

Congress did approve a $290 million budget hike for the IRS, but that money is going to be used to improve customer-service issues not tax compliance and enforcement, reports USA Today. That means there will likely be fewer tax audits in 2016 compared with last year.

But when taxpayers do end up with a regular in person field audit, it will likely be as grueling and intense as it has always been.

7. Obamacare Penalties Are Higher

The changes to Obamacare this year are significant, especially on the penalties side. While the Affordable Care Act imposed penalties for those without having qualifying health care coverage, the penalties were rather small initially.

If you didn't have coverage in 2014, those penalties started at $95 per adult or 1 percent of household income. In 2015, they rose to $325 per adult or 2 percent of household income if you didn't have health insurance that year.

All of these penalties might be confusing for many taxpayers, specifically those who did not have health insurance coverage in 2015 when they file their federal tax return. Visit Healthcare.gov or consult a tax professional if you have concerns.

8. The IRS Has a Program to Exchange Your Account Information

The Foreign Account Tax Compliance Act (FATCA) "requires certain U.S. taxpayers who hold foreign financial assets with an aggregate value of more than the reporting threshold, at least $50,000, to report information about those assets on Form 8938 which must be attached to the taxpayer's annual income tax return," states the IRS.

Those who fail to do so could face stiff penalties which often essentially puts the firms out of business. That's why even in the famously secretive Switzerland, banks have bent over backward to comply with U.S. law.

As of January 2016, more than 100 countries have signed FATCA agreements with the IRS. And in October 2015, the Wall Street Journal reported that the IRS has a new program where they can automatically exchange digital financial account information with tax authorities in other countries.

9. Chances of an Audit Are Higher If You're Wealthy and Live Overseas

Bloomberg Business reported in 2015 that those who make $200,000 to $1 million a year have a 2.2 percent chance of getting audited, which is more than double the average. And for those who make more than $1 million, that number jumps to 7.5 percent. Additionally, U.S. taxpayers overseas had a greater chance of getting audited in 2015.

Furthermore, the Wall Street Journal recently reported that an inspector general's report is urging the IRS to focus on auditing the super wealthy instead of those who make $200,000 to $400,000 a year.

All of this changes the way wealthy U.S. taxpayers, those traveling abroad and U.S. expatriates have to think about filing their taxes in 2016. Filers who try and use any international tricks to minimize taxes can face substantial penalties and even possible criminal prosecution.

10. Start Gathering Your Documents Now

Tax planning in any year is never fun, but 2016 might be particularly difficult for a wide variety of groups. Taxpayers need to understand the changes in Obamacare, for example, and how the IRS will use their personal data to try to prevent identity theft which will require more effort from taxpayers as well.

In this environment, planning and early research is the best way to get started. Start collecting your personal tax documents early, especially your Affordable Care Act paperwork.

11. The Tax Deadline for Filing Is Different This Year

The IRS deadline for filing taxes is generally the same each year - April 15. But this year, the filing deadline is three days later thanks to a federal holiday, Emancipation Day, being celebrated in Washington, D.C. Since the 15th is a Friday and the IRS cannot require the filing deadline be a holiday or weekend the deadline rolls over to Monday, April 18.


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