June marks the mid-point in the year and is a good time to pause and do some income tax planning for 2011. Step one is to decide what to do with your income tax refund if you are one of the more than fifty-seven million taxpayers receiving a refund. The average tax refund this year is $3,036. Too often people think of this as ‘found money’…a bonus of sorts and will spend it frivolously so that six months from now they have no recollection of what happened to the money. A smarter choice is to realize that any refund is part of your hard-earned earnings and use it to get a step ahead financially. Here are a few ideas:
- Contribute to a Traditional or Roth IRA for 2011. Yep, it’s early in the year which means your money starts working for you tax-deferred quicker.
- Pay down credit card debt. Credit cards typically charge double-digit interest rates. Realize this money fundamental: paying off a credit card that’s charging 18% interest is the same as ‘earning’ 18% on an investment.
- Invest in your child’s education. A 529 college savings plan allows your investment to grow shielded from current income taxes and withdrawals, when used for qualified education expenses, are 100% tax-free. For residents of Alabama, we now have one of the best plans in the nation through the Vanguard Group. In addition to low investment costs, you’ll receive a state income tax deduction for contributions of up to $5,000 per year ($10,000 for couples filing jointly). For more information go to www.collegecounts529.com.
- Make home improvements. The summer heat wave is on the way. This is a great time to up the energy efficiency of your home with added insulation, heat-shielding window treatments and servicing your air conditioning system. This is an investment that keeps on giving through reduced bills for years to come. Be sure to check for tax credits that are available with many energy improvements.
- Seed your holiday gift fund. Blink your eyes and the holiday season will be upon us. Consider using your tax refund as seed money for holiday spending. Then, based on how much you plan to spend, add a little each month so you’ll be ahead of the game.
- Give to charity. I can’t remember a time when folks were in more need of financial help than now, especially the hundreds of Alabamian’s that lost everything to the recent tornados. If you feel blessed, share the blessing! You’ll be doing a lot of good for families who are in great need and you’ll receive a tax deduction as a small bonus!
Step two is to do a little planning for the 2011 tax year. I’ve noticed that a lot of people get excited about receiving a tax refund. However, clearly all you’ve done is to make the government a tax-free loan. A better strategy is to calculate your taxes as close as you can to the actual amount you will owe and have your employer adjust your paycheck. Use this extra income to fund one of the strategies discussed above or to increase contributions to your employer’s retirement plan.