How to profit from your 2010 tax refund
For many Americans, a tax refund can be a small financial windfall.
The average refund for 2009 federal income taxes was $3,036. But how much money you get back isn't as important as what you do with it.
Follow our 6 smart moves and profit and prosper from your tax refund.
Smart move 1. Top off your emergency savings.
If there's one thing the recent recession taught us, it's that we need to have money on hand to weather life's nasty surprises.
If you don't have at least six months of living expenses put away, you're walking a financial tightrope.
Put your refund in a savings account. That way, if you lose your job, your vehicle breaks down or you suffer an accident, you won't immediately fall into the poorhouse.
Smart move 2. Pay down high-interest credit card debt.
If you're paying 20% interest on your credit card balance, you're throwing money away every month. Use your refund, or at least part of it, to pay down some high-interest debt. You'll thank yourself later.
Our credit card calculators can help you develop a plan for paying off a single credit card or a bunch of credit cards.
Smart move 3. Fund your retirement accounts.
It's never too early or late to start saving for retirement. The more you put away now, the more compounding can work in your favor and the less you'll have to save overall.
The annual IRA contribution limit is $5,000 for savers younger than 50 and $6,000 for those older than 50.
You also can contribute to the previous year's IRA until April 15 of the following year. So be sure to max out your 2010 IRA contributions before starting on the 2011 contributions.
Smart move 4. Put it toward your housing.
If you're a renter:
Sinking real estate values combined with historically low interest rates means it is still a great time to buy a house. A $3,000 refund could be a decent chunk of a down payment. It also could cover most, if not all, of the closing costs.
Use our rent vs. buy calculator to see if it's the right move for you.
If you're a homeowner:
You might have missed the super low 4% rates, but if you're paying more than 6% on your mortgage, it might still be worthwhile to refinance.
You can put your tax refund toward closing costs.
Or you can pay down some principle on your mortgage. This won't reduce your minimum monthly payments. But it will save thousands of dollars in interest payments and allow you to pay off your home loan months, if not years, sooner.
See how much you can save with our mortgage calculator.
Smart move 5. Pay off your car or home equity line of credit.
If you have your emergency savings in place and have wiped out your credit card debt, you might want to pay off your car or HELOC loan if you have a small balance.
While you likely have low interest rates on these loans, getting rid of them will give you a feeling of accomplishment.
You'll also have one less bill to pay and worry about every month. And with one less bill, that gives you more money to add to your savings account.
Smart move 6. Do something fun.
If you have your financial house in order, there's nothing wrong with blowing your refund on something fun. After all, making the right financial decisions is ultimately about ensuring you have enough money to have fun.
Always wanted to take guitar lessons? Learn how to slice and dice? Need an escape from reality for a couple of days?
Do it. You deserve it.
Finally, if you're getting a massive tax refund year after year, you should consider adjusting your withholdings.
It's nice to get a lump sum payout in the spring, but it's even better to get that money year-round. You'll be able to put that money to better use (by placing it in interest-bearing accounts or paying off debt) each month. When you let Uncle Sam hang onto it, you're merely given him an interest-free loan.
Adjust your withholding and file a new W-4 with your employer.