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Best uses for your tax refund

In 2012, the Internal Revenue Service issued refunds to 110,471,000 taxpayers. The average taxpayer refund was a whopping $2,803.

Tax refund

Big refunds may feel like a good thing but keep in mind what they are, really: Interest-free loans to the government.

Changing your withholding on your federal form W-4 to have less taken out of your check means more for you during the year. The average refund — if taken out in equal installments in your paycheck over the year rather than all at once at tax season — would have resulted in more than $200 per month in your pocket.

Tax season is, of course, a good time to make prospective changes — but what’s done is done for the prior tax year. If you’re expecting a nice-sized refund for 2013, make it count. Here are some top refund ideas for families:


Apply it to next year’s tax bill

If your refund took you by surprise this year — and is the result of a particular turn of events and not an issue with your withholding — consider applying some or all of your refund toward next year’s tax bill. The IRS makes it easy by allowing you to designate the amount of your refund to be applied toward the next year. Of course, this only makes sense if you expect to owe taxes next year so be sure to ask your tax professional to give you an idea of what your tax picture will look like in 2014 before making the decision.


Pay off your debt

While you may want to rush out and buy a new pair of Jimmy Choos, check out your debt picture first. A tax refund is a great way to pay off credit card bills or other existing debt, saving you even more money in the long run.


Invest in a 529 plan

A 529 plan is a great way to save for college. Funds grow tax-deferred until you use the money inside the plan for qualifying education expenses. Some states even offer you a tax break for making contributions making it even more attractive.


Pay for camp

Summer camps fill up quickly and tuition tends to come due in winter and early spring. Some camps offer breaks on tuition if you pay early; paying in installments often costs more. If your refund allows you to prepay, you can do it now and save. Of course, be sure to confirm that your child will actually be headed to camp when you pay since most camps don’t offer a refund if you change your mind.

Signing up for summer camp: Is it deductible? >>


Save for a rainy day

Conventional wisdom says that you should have a cushion of at least three months to protect your family from unexpected expenses. Realistically, most of us don’t have the luxury of saving when we should: We’re too busy paying bills now. A refund offers you a great opportunity to put money aside for a rainy day. Consider locking up the money in an investment vehicle like a CD, which makes it less likely that you’ll tap it early. But don’t lock it up too thoroughly: You want to be able to access it in an emergency.

More about family finances

The new tax picture in 2013
Claiming dependents on your taxes
Tax consequences of gifts to kids

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