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Best ways to spend your tax refund

As the April 15 tax filing deadline nears, many people will be in the enviable position of receiving a tax refund. It’s a nice surprise to get back some of the money you paid in taxes during the year. It’s also a great opportunity to make some sound financial decisions that will reap benefits now and in the future, according to the Maryland Association of CPAs.

So before you splurge all of your newfound funds, consider some of these money-wise alternatives.

Pay off your bills

If you have high-interest credit cards, hefty student loans or any other debts looming over your financial landscape, CPAs recommend that you use some, if not all, of your refund to pay them down as much as possible.

If you pay off a credit card with a 16 percent interest rate, you’ve just gotten yourself a 16 percent return on your money —- an added bonus that compares very well with most investments.

Once you’ve wiped the slate clean of outstanding debt, you can use your hard-earned money to save up for dream purchases. But if you don’t lower your debts, you will instead end up wasting money on interest charges.

Save for the future

Would you like to further your own education or send a child to college? Or are you planning to buy a home during the next year or two? Perhaps you have been hoping to take a truly memorable vacation sometime down the road?

No matter what your dreams, the best way to make them come true is to save regularly so that you have the cash ready when you need it. Use your tax refund to open a savings account or deposit it into an existing account. Then let the money grow until you’re ready to follow your dream.

Get a head start on retirement savings

Do you have a retirement account in which you build up cash for the future? Use at least some of your refund dollars to start one or add to an existing account if you do have one. That way, your refund can grow tax free and provide a firm foundation for your retirement.

Create an emergency account

We all know it’s a good idea to set aside some money to cover unexpected emergencies, such as loss of a job, an injury or hospitalization or another unforeseen crisis. However, after paying your regular monthly bills, it can be difficult to earmark funds for an emergency. That’s why it’s a great idea to use your windfall from Uncle Sam to do it.

Splurge, but do it wisely

If you don’t have any high-interest debts and you do follow a regular savings plan and set aside money for retirement, then go ahead and splurge your refund.

When you’re deciding how to spend the money, though, CPAs recommend that you consider indulgences that might be a good investment, such as updating your kitchen or bath or taking other steps that will improve your home’s resale value. They are fun choices, and they will also pay you dividends in the future.

Check your withholding

Finally, remember that while it’s great to get an unexpected cash windfall, if you regularly receive large refunds every year, you may be having too much money withheld for taxes from your paycheck. That’s a bad idea, because you could be using that cash all year as part of your regular budget.

If you think this may be the case, speak to your CPA about whether you need to adjust your withholding amount.

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.