LA JOLLA, Calif., April 27, 2015 /PRNewswire/ — It's been about a week now since the filing deadline for your 2014 tax returns. Now the wait is on for those expecting a federal refund. The IRS has reported that the average tax refund in 2014 is about $3,116. If you e-filed and use direct deposit, the IRS estimates that you should receive your federal refund between 8 and 14 days after they accept your return. Most refunds (90%) are issued by the IRS within 21 days. So while you're sitting there anxiously awaiting that refund, it's a good time to figure out what you should do with that money. You should consider whether this money should go to pay down your debts before you go on a spending spree. If you owe credit card debt, old medical bills, federal student loans, private student loans or any other debts, you should have a plan to eventually pay them off. Here are three considerations you should make before you refund arrives.
1. Do you know what you owe?
This is the first thing you should consider. Just a little under half of our country's households have some sort of credit card debt. These can carry interest rates of up to 18%. Many consumers are also paying back student loans. If you have federal student loans, the interest rates can vary from 2% (if you were able to consolidate at the right time) up to around 7% for Direct PLUS Loans. Private student loans can carry interest rates of 7% to 12%. Take a look at the interest you are paying on each debt to see which one is costing you more in interest. While it may be tempting to just get rid of one debt, you should focus on paying the one that is costing you more money when considering the accruing interest.
2. Do you have a rainy day fund?
Cars break down. People lose jobs. Minor emergencies pop up. Life is full of surprises and you want to be financially prepared for them when they occur. Most experts recommend having money set aside to deal with life's little surprises so that you don't have to resort to high interest credit cards to make a payment. Ideally, you would have the equivalent of 3 months' salary in the event you lose your job. However, for those struggling on a monthly basis, sock away what you can, even if it's just $500. Add to that when you can to build up your emergency fund. Then don't touch it for anything else other than a true emergency.
3. Have you maximized the investment in your retirement?
You can actually use your tax refund to create a deduction for your 2015 taxes. You can do this by contributing to a Roth IRA. You might also consider opening or contributing to an existing 529 college savings plan. If you have already maxed out your contributions to a tax-sheltered account, congratulations! Consider putting your refund in a taxable investment account, such as a mutual fund or Index fund. If you're not comfortable doing this on your own, check out Scottrade.
This list is by no means exhaustive. There are plenty of other things you could do with a tax return: make home improvements, donate the money to charity, or use it as seed money for a new or existing business venture. And if you still have something left over after all this, go splurge a little! It's perfectly okay to do this if you can truly afford it and not compromise existing debt repayment. Finally, while tax refunds are a nice bonus at the end of the tax year, it means you have given the government an interest-free loan over the year. Consult with a tax professional to make sure you are having the appropriate deductions taken from your pay.
Daniel R. Gamez, an attorney focusing exclusively in debt settlement, is licensed to practice in all state and federal courts in California and Texas. Mr. Gamez owns and operates the Gamez Law Firm in La Jolla, CA. For more information, please contact Daniel Gamez at 858-217-5051, Email, or visit gamezlawfirm.com.