Released Feb. 22, 2008
COLLEGE STATION, Texas - A new high-definition television set. A Carribean cruise. Pay off bills.
Lists are being made all across the nation now as Americans ponder how to spend a tax refund.
But financial planners encourage a different mix - one that allows some spending but also adds “Save” to the list.
“Sometimes when I am doing tax work, I’ll ask, what are you going to use your refund for, and a lot of people say paying bills, buying a car, or getting a car to get them to work if they have a car that is not reliable. A lot of people are just going to go out and spend it on whatever. Saving is not a very common answer,” said Joyce Cavanagh, a Texas AgriLife Extension Service family economics specialist.
She said people have been conditioned to thinking a refund comes in one check and thus can be used in one way - either spent or saved.
But now, people may select to receive their refund either in one lump sum or have it divided and distributed to as many as three accounts using Form 8888, according to the IRS.
“Realistically, you are not going to get most people -- particularly if they get a really large refund -- to save all of it,” Cavanagh said.
A tax preparer or individual simply designates on the form the account numbers and routing numbers for the refund to go to, she said. This may include checking or savings accounts or even mutual funds or a retirement account.
“People can feel like they can spend some, but there is a way to designate a certain amount of it to go to a vehicle where they are saving it,” Cavanagh added. “Because if it all gets deposited into the checking account, the likelihood of saving any of it is not as high as if you automatically designate part of it to go to a savings account to begin with.”
Nancy Granovsky, AgriLife Extension family economist, recommends having a “set-aside account” to deposit some of the refund to cover unexpected or occasional bills that otherwise don’t factor into monthly payments.
“People can look at the times during a year that require expenditures that put them in a bind,” she said. “Things like school supplies, car insurance premiums and holiday gifts, for example.”
But debt repayment is another consideration for tax refund use, Granovsky said.
“Think of it not just as paying off a debt but as a return on an investment. If you pay off a credit card with 22 percent interest, that is like earning a 22 percent return on the dollar,” she explained.
Overall, the family economists recommended, following three refund rules:
- Plan ahead before spending a refund.
- Devote a portion toward long-term financial security.
- Don’t “throw away” a portion of your money on loan fees just to get a quick refund.
Granovsky said family economists actually enjoy this season as it affords the opportunity to help people make better decisions on paying taxes and using possible refunds.
“Taxes come and taxes go,” she said. “But they can be an opportunity to look at our overall well-being and see how that tax money can work for us. That way, tax season is not something to dread.”
For more information about splitting tax refunds, see http://www.irs.gov/taxtopics/tc152.html.
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http://agnews.tamu.edu/showstory.php?id=362
Contacts: Joyce Cavanagh, (979) 845-3859, JACavanagh@ag.tamu.edu
Nancy Granovsky, (979) 845-1869, n-granovsky@tamu.edum
Kathleen Phillips, (979) 845-2872, ka-phillips@tamu.edu
