Are you expecting a tax refund this year? While many taxpayers spend their tax refunds right away on frivolous things, smart savers can use their refunds to fund even more tax savings. This could boost your financial plan in the long term. What might you choose to do with your refund to bolster future tax savings? Here are a few great choices.
1. Contribute to an IRA
Contributions to a traditional IRA are not taxable the same year in which you make the account. Those with a higher effective tax rate now than what they expect to have in retirement are able to benefit the most from taking advantage of this tax deferral. While you cannot contribute for the preceding year at this point, IRA contributions will lower next year's taxes. Taxpayers can open an IRA through most financial services.
2. Contribute to a 529 Plan
College savings plans, known as 529 plans, are state-sponsored and can offer a few state tax savings. Many states allow you to deduct your contributions from taxable income on your state tax forms. And earnings grow without tax effects until you spend the money on qualified educational expenses for the designated beneficiary, or even a different one.
3. Buy Savings Bonds
The IRS offers taxpayers an option to automatically use their refund to buy a few Series I savings bonds. These bonds allow you to invest for the future in a very safe investment tool, and Series I savings bonds are not taxable at the state level. Bonds are a good way to create more balance in a risky portfolio.
4. Pay Deductible Expenses
While many taxpayers use the standard federal deduction, others claim actual expenses from a list of itemizable deductions. If you expect to itemize your deductions next year, money put toward these expenses now will be deducted from taxable income. Itemizable expenses include charitable donations, medical expenses, mortgage interest, and state and local taxes.
5. Buy a Capital Asset
Capital assets are larger assets that you can buy and hold for investment purposes. They range from stocks and bonds to vintage cars and rental properties. The tax advantage to a capital asset lies in its tax rate. When you sell an asset held for more than one year, the tax rate is usually no more than 15%. Not only do you get great tax benefits, but you also increase your long-term investments.
Where to Learn More
Still want to know which tax-saving method you should use to invest your refund? Meet with a financial planner in your state today to go over all the options and select the best fit for you. But no matter what you choose, the result will be more financial stability and a brighter future.