Tax season 2024 is upon us, and let’s be honest, it’s not the most exciting thing to spend your free time doing. But even so, it’s crucial to file taxes to show the Internal Revenue Service (IRS) how much you spend on taxes. It can be rewarding as well. Did you know that if you file your taxes, it could also pay you in a sense?
What we mean by that is if you have overpaid your taxes, then the IRS could send them back as tax refunds. The problem is tax refunds can take around weeks or even months (if sent by mail) to process. If you need them urgently, you could opt for tax return loans that you can get in a day from an expert tax preparer.
Now, tax return loans could help with getting money on urgency, and you could use them to make any kind of payment, but what if we tell you there are some smarter ways of using your tax refunds? Intrigued? Before you dive into filing, let’s explore eight smart ways to use your tax return advance to make spending a lot easier. We’ll show you how to make this tax season pay off in more ways than one!
8 Smart Ways to Use Your Tax Return Loans
A tax return advance can be a springboard to financial wellness, but how you use it matters. Here are eight strategic ways to leverage your 2024 tax return advance:
1. Build an Emergency Fund
The average American taxpayer receives a $3,213 refund in 2024, according to the IRS. This can be tempting to spend, but consider building an emergency fund instead. Unexpected expenses happen – car repairs, medical bills, appliance breakdowns.
An emergency fund protects you from falling into debt or financial hardship during these times. Aim to save three to six months of living expenses. Even a portion of your tax return advance can be crucial in building this safety net.
2. Invest for Your Future
Retirement may seem far off, but time is your greatest financial asset. Even a small investment from your tax return advance can make a big difference over the long term. Consider an Individual Retirement Account (IRA) for tax-advantaged retirement savings.
Traditional IRAs offer tax deductions based on contributions, while their alternative Roth IRAs allow tax-free withdrawals in retirement. If you have 401(k), contribute enough to get the full employer match.
3. Slay High-Interest Loans
Credit card debt can cripple your finances with sky-high interest rates. Put your tax return advance towards paying down these balances first.
Focus on the highest interest cards first to save the most money in interest charges. Crushing this debt frees up monthly payments you can then direct towards other financial goals.
4. Make Smart Home Improvements
Not all home improvements are created equal. Strategic upgrades can increase your home’s value and save you money down the line. Consider energy-efficient upgrades like windows and insulation, which can lower your utility bills.
Kitchen and bathroom renovations are popular choices that also tend to offer a high return on investment. Consult with a contractor to prioritize projects that will yield the biggest financial benefit.
5. Strategically Pay Down Debt
As mentioned earlier, high-interest debt is a financial drain. While it’s tempting to spread your tax return advance across multiple debts, a targeted approach is more effective.
Focus on paying down the high-interest balances first. This saves you the most money in the long run and helps you snowball your debt payments as you eliminate each balance.
6. Avoid the APR Trap
Many credit cards offer enticing 0% introductory APR periods. While these can be helpful for short-term purchases, be mindful of the end date. If you don’t pay off the balance before the introductory period expires, you’ll be hit with retroactive interest charges.
Use your tax return loan to ensure you pay off the balance before the standard APR kicks in, saving you from unnecessary interest fees.
7. Improve Your Credit Score
Your credit score is a critical factor in determining loan interest rates, insurance premiums, and even rental applications. Reducing your debt utilization ratio is a significant way to improve your credit score.
A large payment towards your credit card balances with your tax return advance can significantly improve your credit utilization and boost your credit score.
8. Qualify for a Balance Transfer Card
Even if your tax return advance isn’t enough to completely eliminate your card debt, it can be a stepping stone. By making a significant payment on your existing balances, you may qualify for a balance transfer card with a 0% introductory APR period.
This allows you to consolidate your remaining debt onto a single card with no interest charges for a set period. This can help you focus on paying down the principal balance without the burden of accruing interest.
How to Boost Your Tax Return Loans?
While a tax return loan can be a helpful tool, it’s even better when paired with strategies that maximize your refund. Here are some key areas to consider to get the most out of your tax filing:
1. Rethink Filing Strategies
Your filing status significantly impacts your tax bill and potential refund. While most married couples file jointly, it’s not always the best option. Consider filing separately if:
- One spouse has high medical expenses: If one spouse has substantial medical bills, like COBRA payments, filing separately might allow for a larger medical expense deduction.
- Child Tax Credit benefit: Married couples filing separately may qualify for a larger Child Tax Credit in the scenario that their adjusted gross income falls below the IRS limits.
Remember, separate filing has drawbacks, too. You may lose out on certain deductions and credits available to joint filers. Both spouses must choose either the standard deduction or itemized deductions; you can’t mix and match. The best approach depends on your specific situation. Running calculations for both filing options can help you maximize your refund.
Head of Household Status
Unmarried taxpayers with qualifying dependents can sometimes reduce their tax burden by filing as Head of Household. This status offers a higher standard deduction and more favorable tax brackets compared to filing as a Single.
A qualifying dependent can be a child you financially support who lived with you for more than half a year or an elderly parent you provide for financially. Many taxpayers caring for elderly parents don’t realize they can qualify as Head of Household, even if their parents don’t live with them. As long as you provide more than half of your parent’s financial support, you might be eligible.
2. Consider Tax Deductions
Many valuable deductions exist that you might be overlooking. Here are some commonly missed deductions that can significantly increase your refund:
- State and Local Sales Tax: The IRS offers a tool to help you determine the deductible amount of your state and local sales taxes.
- Reinvested Dividends: While not technically a deduction, reinvested dividends from mutual funds can reduce your overall tax liability.
- Charitable Contributions: Keep track of all charitable contributions, including smaller expenses like ingredients for a bake sale donation. These small contributions can add up quickly.
- Student Loan Interest: You can deduct student loan interest payments, even if someone else made the payments on your behalf.
- Child and Dependent Care: Qualifying child care expenses can be used for this credit.
- Medical and Charity Miles: Track mileage driven for medical care or volunteering purposes. The IRS allows deductions for qualified mileage at a set rate per mile.
Remember: Keep good records for your deductions, especially for non-receipted expenses like charitable contributions or mileage. A simple notebook can suffice. Track the date, miles driven, the purpose of the trip, and the market value of any donated goods.
Traditional IRA Contributions: Contributing to a Traditional IRA reduces your taxable income. The deadline to contribute for the previous tax year is typically the tax filing deadline (unless extended due to holidays or weekends).
3. Maximize Your IRA and HSA Contributions
IRA Contributions: The deadline to open or contribute to a Traditional IRA is usually the tax filing deadline. This flexibility allows you to claim the deduction on your return and use your refund to fund the IRA. Traditional IRA contributions can significantly lower your taxable income. Take advantage of the maximum contribution limit, and if you’re over 50, consider the catch-up provision for additional contributions.
Roth IRA Contributions: While contributions to a Roth IRA don’t offer immediate tax deductions, they still qualify for the Saver’s Credit if you meet income requirements.
Health Savings Account (HSA): Pre-tax contributions to an HSA reduce your taxable income. The deadline to contribute is also typically the tax filing deadline. However, there are specific requirements to qualify for an HSA, including having a high-deductible health insurance plan.
4. Become Tax Credit Savv
Tax credits are even more effective for boosting your refund than deductions because they directly reduce your tax liability. Many people miss out on valuable tax credits:
- Earned Income Credit (EITC): A significant number of eligible Americans don’t claim the EITC. You may qualify for this credit even if you’re single with no children.
- Child and Dependent Care Credit: Claim this credit if you pay for childcare expenses.
- Education Credits: Several education credits are available for college students or those supporting a child in college.
Final Note:
Tax season is here, and while getting a refund is great, wouldn’t it be better to maximize that return and set yourself up for a more secure financial future? A tax return advance from ATC Income Tax can bridge the gap until you receive your refund.
Remember, tax planning is key! By taking advantage of deductions and credits, you can get the most out of your tax return. ATC Income Tax can help you navigate the complexities of tax filing and ensure you claim all the deductions and credits you deserve.
