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Smart ways to spend your tax refund

Have you been dreaming about using your tax refund to buy that shiny new plasma TV?

Don’t do it, cautions the Maryland Association of CPAs. You have better things to do with your money –- and it is your money. While many people view their refund check as a gift from the government, nothing could be further from the truth.

The money was yours all along; you just gave the government an interest-free loan by allowing Uncle Sam to withhold too much money from your paycheck. So why not think of your refund check as a second chance to do something smart with your money?

• Compromise. OK, if you just can’t resist using your tax refund for something fun, consider spending 80 percent wisely and splurging on 20 percent. For example, instead of blowing your entire refund on a week’s vacation, plan for a long weekend trip or a special night out.
• Destroy debt. One of the best ways you can use your tax refund is to pay down credit card debt. Not only will you reduce -– or hopefully eliminate –- your monthly credit card payments, but you can save money on the interest you would have paid. If you have several credit cards, pay off the one with the highest interest rate first, then work your way down.
• Buy some peace of mind. Most financial experts recommend that you set aside at least six months of income in an emergency fund. Without an emergency fund, you could end up dipping into your investments or relying on credit cards to see you through a bout of unemployment or a wave of unanticipated expenses. Keep the money in a savings or money market account that you can easily access in an emergency.
• Bring it home. If you’re a homeowner, one of the best ways to spend your tax return is to invest it in maintaining or improving your home. A fresh coat of paint, an updated bathroom, or some new landscaping not only increases the value of your home, but improves your quality of life.
• Get smart. How about using your refund to take your career to the next level? Sign up for a course and learn new skills. If you’re thinking of changing jobs, attend a conference or a seminar where you can network with others in your field.
• Fund your retirement. Consider using your refund to open or add to a traditional or Roth IRA. Both offer tax advantages and can help ensure a secure retirement. The contribution limit for 2007 is $4,000. Taxpayers who are age 50 or older can contribute an extra $1,000.
  
  If you’re one of those people who get a large refund year after year and you’re not contributing the maximum to your 401(k) plan, think about lowering your tax withholding for 2007 and using the extra money to bump up your retirement contributions.
• Think tuition. If college education costs are in your future, use your refund to start or add to a 529 college savings plan. The tax-free status of withdrawals for qualifying education expenses was set to expire in 2010, but last year’s Pension Protection Act made the benefit permanent.
• Do some good. Donate a portion of your refund to your favorite charity. Not only will you be helping someone in need, but you may earn a tax deduction for next year’s return.
• Get a jump on payments. Consider putting some money aside to pay for annual bills, such as insurance premiums and health club memberships that you tend to forget about until they come due.
• Take stock. Have you been telling yourself that you’ll start investing when you have some extra money? This is your chance to make good on your word. Mutual funds, which are less risky, are a great way to get started.
• Come up with a plan. A comprehensive financial plan is a great way to make your refund pay off. Make an appointment with a CPA who can help you plan your financial future.
• Change your withholding. If your CPA agrees that a change is appropriate, complete a new W-4 form, increasing the number of personal allowances you claim. This adjustment will reduce the amount of tax money withheld during each pay period and increase your take-home pay. Just be sure that you have a plan in place for using that extra money in your paycheck to invest, save for retirement, or avoid debt.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.