Make the Most of Your Income Tax Refund

Click on our Advertisement

The latest tax law included a new 10% tax bracket, which means that, depending on your filing status, the first $6,000 to $12,000 of your income will be taxed at 10% instead of 15%.

If you're expecting an income tax refund this year, you're probably plotting and planning how to spend it. It would be a shame to fritter this money away, so here are some ideas on how to get the biggest bang for your buck.

Pay Off Debt

If you have a credit card with a double-digit interest rate, the best thing you can do with your money is to pay down this debt. If you're like many Americans, you may not be paying much more than the minimum payment each month. When you pay only the minimum payment, most of it goes towards interest instead of reducing the amount you borrowed (the principal), which is why it takes so long to pay off the original debt (often 20 to 30 years).

Make an IRA Contribution Now

If you're eligible to make an IRA contribution, you can come out ahead by making it now instead of waiting until you file your taxes in April. Why wait until April to start earning money on your contribution?

Pay Down Your Mortgage

Making a lump sum payment to be applied to the principal on your mortgage can save you the most money in the long-term because mortgages are usually our largest and longest-term debt. A $1,000 pre-payment on a $100,000 mortgage at 7% would save you over $4,000 over the life of the loan.

Pay Off Your 401(k) Loan

If you've borrowed from your 401(k) account and are thinking you're coming out ahead because you're paying yourself back by making the loan repayments, think again. You'd be better off to pay off the balance and use the money you would have applied to loan payments to make additional tax-deferred contributions to your account instead. Remember, the money you borrowed is not in your account and therefore is not earning interest or appreciating in value.

Beef Up Your Emergency Fund

The job market is unpredictable, and your job might be one of the next to be cut. Don't be caught unprepared if you're one of the hundreds of thousands of people who are laid off or fired. You should have an emergency fund that would cover three to six months worth of your basic living expenses. If you don't, adding your tax rebate or refund to your emergency fund may be a smart thing to do.

What's best for you depends on your personal situation, but for most people, one of the options discussed here will benefit you most in the long run.