Ah, tax season. On April 15th, many Americans will find themselves crying on the curb while others will be skipping the sidewalks. It’s a strange time when our nation comes together to reconcile with the IRS and find out whether they owe or are owed.
For the lucky bunch who properly managed their taxes and are owed money, it can be a time when it’s tempting to go buck wild with spending. In actuality, one in four Americans have spent their refunds wisely – paying down debt.
So, instead of going crazy, we’ll offer a few other smart tips on how to wisely handle a tax refund and even set yourself up to score big in the future as a result of the IRS’ payment.
Start Building an Emergency Fund – Especially If You’re Self Employed
While tax season may have gone well for you this year, you never know when you’re in for a rainy day. According to Olga Kirshenbaum, founder of Rags to Riches Consulting, without an emergency fund, things can get scary – particularly for those who don’t have their taxes automatically taken out each month and who cannot depend on fixed income month-to-month
“I once worked with an individual who was a 1099 employee and didn’t realize that this means you’re responsible for your own tax payments during the year,” Kirshenbaum explained. “After filing taxes for that year, there was a $30K tax assessment. A terrifying position to be, especially if you don’t have the money to pay it off!”
“If you’re self-employed there are software options, like QuickBooks, that will calculate your quarterly tax estimates based on your income and expense each quarter. If you underpay your self-employment taxes, it’s possible you’ll be hit with a penalty for underpaying your taxes for the year. The fees for QuickBooks each month are minimal and can save you hundreds of dollars in the end.”
Pay Your Taxes Ahead of Time
According to Vincenzo Villamena, CPA at Global Expat Advisors, you can pay your taxes early – quarterly in fact – especially if you’re an independent contractor like 50% of the millennial population.
“You should always plan on paying taxes, especially if you are an independent contractor,” he warned. “Estimated tax payments throughout the year can be based on prior years taxes owed. These taxes are paid quarterly on April 15, July 15, Oct 15 and Jan 15.”
Redirect That Extra Cash Immediately
The temptation to immediately join “Gucci Gang” or pretend like you’re in a 2Chains video and tear down Versace will be imminent upon realizing that you’re going to receive thousands of dollars back from the IRS. In fact, it can often feel like free money.
But remember – it is actually your hard-earned money that the IRS “held” from you. Thus, it should be treated and saved as such.
“Should you find yourself with a surplus in your bank account… divert it to another savings account dedicated solely to tax payments if you think you’ll owe next year,” David Bakke, a personal finance expert at Money Crashers, suggests.
Or, simply commit those funds to a long-term goal that you’ve been saving for in your budget. Because – you do have a budget, right?
Invest Those Coins into You
While your tax return may not feel like a huge investment opportunity, it could be the right moment to kick-off a new resolution to invest in your future.
In a podcast with Gary Vaynerchuck, Tony Robbins discusses his new book Unshakeable, in which he suggests that millennials especially, should be investing in the market and leaving their money there.
While most people are spenders, Robbins implores millennials to become owners. With just $4,000 a year (the amount some people typically get back in tax returns) you can set yourself up for a lifetime of financial stability.
Start with sources like Stash Invest, which are great for beginners.
Start Your Dream Business
If you’ve been waiting for the perfect moment to start your new business or career path – maybe because you can’t afford the proper training or because you’ve just been too afraid, now is the time to take advantage of your new cash flow and invest it into something you can count on: yourself.
If you start today, you may find that by this time next year, you’re 365 steps closer to your dreams.