Tuesday, May 10, 2011

10 Smart Uses for Your Tax Refund

Excerpt from 10 Smart Uses for your Tax Refund
By Kiplinger.com

So you got a refund check. Chances are it's for thousands -- the average refund is nearly $3,000 this year, according to the IRS. That's a nice chunk of change. Here are ten good things you could do with the money.

1. Pay Off Credit-Card Debt
Using your refund to pay off a balance with an 18% interest rate is like earning 18% on your investments -- an incredibly valuable use of the money. And if you pay off your balances, you can afford to close some cards that are now charging high fees.

2. Rebuild Your Emergency Fund
Many people had to raid their emergency fund over the past year and had little extra money to restore it. You could use your refund to start rebuilding that fund, which can help you avoid landing in credit-card debt if you have an emergency. Keep the money easily accessible in a money-market account or savings account that earns interest.

3. Boost Retirement Savings
You can take up to $5,000 of that check and put it toward an IRA for 2011 (or $6,000 if age 50 or older). If your modified adjusted gross income is $122,000 or less if you’re single, or $177,000 or less if you’re married filing jointly, then you can contribute to a Roth IRA, which lets you withdraw the money tax-free in retirement. If you earn too much for a Roth, you can contribute to a nondeductible traditional IRA, then convert it to a Roth.

4. Fund a Taxable Account
Already maxing out contributions to your tax-deferred retirement account? Consider opening a taxable account and using your refund cash to buy stocks or funds. There are no restrictions (such as early-withdrawal fees) on tapping taxable accounts. Plus, when you sell a winner you are taxed on the profits at the maximum 15% capital-gains rate. Traditional-retirement-account distributions, however, are fully taxed at ordinary rates as high as 35%.

5. Fill Gaps in Your Insurance
For less than $1,000, you can plug menacing holes in your homeowners policy: coverage for flooding and liability. Flood-Insurance Policy. If you live in a low- to medium-risk area, it costs about $350 to $600 per year from the National Flood Insurance Program with the maximum $250,000 in dwelling coverage and $100,000 for possessions. Get a price quote at www.floodsmart.gov. Liability Insurance. Cover your legal expenses if someone is hurt in your home or by your car. It generally costs just $150 to $300 to buy a personal umbrella policy that provides $1 million in coverage over the limits or your auto- and homeowners-insurance policies.

6. Build Your College Savings
It’s always hard to juggle saving for college and retirement. Here’s an opportunity to use your extra money to contribute to a 529 account. You’ll be able to use the money tax-free for college bills, and you could get a state income-tax deduction for your contribution.

7. Help Your Kid Save
You can use the extra money to contribute to a Roth IRA for your child. Your kid is eligible as long as he or she has earned income -- from mowing yards or babysitting, for example. Your child can contribute up to $5,000 or the amount of his or her earned income for the year, whichever is lower, and you can give him the cash to do it. See Roth IRAs for Kids for details.

8. Improve Your Home's Energy Efficiency
You can lower your utility bills -- and get a tax credit -- for installing insulation, energy-efficient windows, central air conditioning and more.

9. Spruce up Your Yard
A little cash can go a long way to improve your home's curb appeal. If your house will be on the market, you can't afford not to spend some money and time on landscaping that will distinguish your house from others.

10. Give to Others
If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You’ll feel good -- and you’ll be rewarded for your good deed when you file your tax return in 2012 (charitable contributions are deductible if you itemize).

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