Category: Taxes

Should You Save Your Tax Refund or Pay Down Debt?

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After diligently filing your income taxes, you’re greeted by a pleasant surprise: you get a refund. And where others may see a surprise windfall as an excuse to go out on the town or pick up that must-have gadget they’ve been eyeing, you make the smart decision to be responsible with your unexpected bonus, choosing instead to put it toward your personal financial stability.

First off, good choice! But now it comes time to make another important decision: do you save that extra money, perhaps for retirement, or use it to pay down debt?

All in all, this decision has no one right answer, as the best thing to do with your tax refund will depend strongly on your individual financial situation. To help narrow down the smartest way to use your refund, ask yourself the following three questions to see where your finances stand.

  1. Are You Behind on Any Debts?

The very first question to ask yourself is whether you are behind on any of your bills or debts, which includes everything from utility and housing payments to credit card and loan payments. If the answer to this question is, “Yes,” then you can stop right here. Your tax refund is best used to catch up on those debts to prevent them from damaging your credit or, worse, becoming charge-offs.

If you have any of your tax refund left once you’ve brought all of your delinquent accounts back into good standing, you may want to look at ways to avoid falling behind in the future. For example, credit card balance transfers can be a good way to lower your interest rate (and, thus, your payments), but there are only a few no balance transfer fee credit cards. The money you spend paying a balance transfer fee can often be recouped by the interest rate savings.

  1. Do You Have Any High-Interest Debts?

If you don’t have any delinquent bills or debts, or you have a portion of your refund leftover after catching back up, you’ll next want to look at any high-interest debts that you currently owe. Start by listing all your debts by interest rate to see where you stand. Any debts with double-digit interest rates should be your first priority, including short-term loans or high-interest credit cards. The debts with the highest interest rates are costing you the most money, so they’ve got to go.

What generally won’t be included on the high-priority debt list are longer-term installment loans, like auto loans and mortgages, that typically have much lower interest rates. Even bad-credit mortgage loans tend to have single-digit interest rates, making them typically the least expensive type of debt to carry.

Once you’ve identified your most expensive debt, focus your tax refund on paying it down. If your refund happens to be enough to pay off that debt entirely, put the remainder toward your next-highest-interest debt (and so on).

Instead of paying off your highest-interest debt first, it can be tempting to instead focus on your smallest debt so that you can enjoy the satisfaction of crossing it off your list entirely. While this method (often called the “snowball method”) can be an effective debt repayment strategy overall — studies say snowballing your debt can have good long-term success — focusing on the highest-interest debt (also called the “avalanche method”) is the more cost-effective plan.

  1. Do You Have an Emergency Fund?

The final question to ask yourself before dumping your tax refund into your retirement savings is whether you have a healthy emergency fund set aside to deal with any unexpected financial events. Most experts suggest having at least three to six months’ worth of emergency savings to cover your necessities in the case of job loss or injury, but even a few hundred dollars to pay for a sudden car or home repair can save you from taking on unnecessary debt in the future.

Once you’ve paid down your outstanding and high-interest debts and built up a solid emergency fund, you’re now ready to focus what is left of your tax refund on more general savings. This may mean a retirement account, such as a 401(k) or IRA, or if your retirement accounts are already in great shape, a personal investment account.

Other than your emergency fund and whatever monies you use for bills, avoid keeping excessive amounts of money in a standard savings account. These accounts tend to have interest rates of 1% or less (more often less), meaning a typical savings account won’t even keep up with the rise in inflation, let alone help you build wealth. Focus instead on investments that will net at least a higher rate of return than the current rate of inflation to avoid losing out on potential income.

If you’re concerned about your credit this tax season, learn how you can start repairing yours. Contact us today to get started. You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.






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Can I Pay My Taxes With a Credit Card?

taxes and credit cards

We spend money all year and give a portion of our paychecks to Uncle Sam. While many of us can expect a nice little tax return after we file our end-of-year taxes, some Americans will still owe more to remain in good standing with the IRS. For those taxpayers who owe at tax time, there may be a question of how to pay the remaining balance, considering that 40 percent of Americans live paycheck to paycheck. So what should you do if you still owe money but have none saved to settle your tax liability?

In the event of an emergency, such as unexpected car repairs or medical bills, many of us choose to put charges on a credit card, so it’s understandable that some would think to put tax payments on a credit card as well. But can you? And more importantly, should you? The short answer is yes, you can pay your taxes with a credit card. But with the average credit card interest rate hovering around 16 percent, it’s not a sound financial decision. Here are some better options:

Work with the IRS

Did you know that the IRS offers payment plans? While it’s preferable to pay your taxes in full and on time, it just isn’t always possible. Setting up a payment plan through the IRS itself can keep you more on track and will ensure that your tax payments are made on time throughout the length of the agreement (they prefer all debts are paid in full within 120 days, though extended long-term plans are available). Penalties and interest will be associated with a payment plan, but it’s worth your time to at least see what the interest rate will be. More often than not, it will be lower than your credit card interest rate. Furthermore, an IRS installment agreement will not be reflected on your credit report and therefore, won’t negatively impact your credit score like credit card debt can. This holds true as long as your payment plan remains in good standing.

Elect to make payments throughout the year

There’s an option on your W-4 to have additional money withheld from your paycheck every month. If you have historically owed money, this is a good way to make sure you don’t end up scrambling at tax time to come up with additional cash. However, this requires a little more foresight, so start planning now for next tax season if you want to utilize this option.

File for an extension

Filing for an extension buys you six additional months to prepare your taxes, and could be another useful tool for those who expect to owe money. It’s simple to do and does not cost money. However, the form is due by the tax-filing deadline (which is April 17 this year), so if you need an extension, now is the time to file for one.

Putting your tax payment on a credit card may seem like an easy solution, but it may not be the most beneficial for those of us trying to get our credit back on track. If you’re in the midst of credit repair, it may be worthwhile to examine how these other options will benefit you financially. For more information, visit

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5 Smart Things to Do With Your Tax Refund

tax refund

We are coming up on that time of year again. No, not the holidays – I’m talking about the 2018 tax season.

Trends from the last 10 years show that on average, about 80 percent of Americans receive a federal income tax refund each year, averaging around $2,800.

That’s no small sum, and if you are due a refund in 2018, it’s not too soon to start thinking about what you will do with the extra cash. While it’s tempting to think about a luxurious vacation or a new flat-screen TV, it might be wiser to put your tax refund toward some budget-friendly, credit-friendly alternatives.

Here are some smart money moves you can make with your 2018 tax refund:

  1. Bolster your savings

According to a 2017 GoBankingRates survey, 57 percent of Americans have less than $1,000 in their savings, and 39 percent have no savings at all. A general rule of thumb when it comes to savings is to set aside enough to cover at least three to six months’ of expenses in case of an emergency situation (like unexpected job loss or a medical emergency).

In 2018, consider stashing away a chunk of your tax refund in a high-interest savings account. Not only is your money safely tucked away in case you need it, it continues to grow.

  1. Invest in the market

Investing in the stock market is a riskier move than opening a savings account, but if you already have a decent savings cushion, investing could be a worthwhile option. The stock market generally offers much higher returns on your money over the long term (although it’s not always consistent). There are a lot of investing options depending on your financial goals and risk tolerance, such as individual stocks and index funds.

  1. Invest in yourself and your family

If you have been looking to improve your career prospects, now might be the time. Consider furthering your education through online courses, new certifications or other professional development opportunities. You could also use your tax refund towards startup costs for your own small business. Or, if you have kids, you may want to consider starting a college fund if you haven’t already.

  1. Buy insurance

You never know when you will need the protection that insurance offers. If you have holes in your insurance coverage, whether life, home, auto, or medical, consider filling them now. In many cases, you can do so for a relatively low cost. For instance, for about $200-$400, you can purchase an umbrella liability policy that protects you in case someone is injured in your home or car.

  1. Pay off debt

Before you do anything else with your tax refund, your first priority should be paying off any high-interest revolving debt you’re carrying. If your tax refund will not cover the whole amount of your debt, you can at least make a dent in it. If you are paying 18 percent interest on credit card debt, collecting minimal interest on money sitting in a savings account doesn’t make much sense. Plus, if you need to fix your credit score, paying off your debt is a major step towards repairing your credit.

Investing your tax refund wisely can be a big step in improving your financial and credit situation for the future. If your credit has been damaged in the past and you’re in need of credit repair company, the legal professionals at Lexington Law Firm can help. Contact us today to learn all of the ways we can help you improve your credit.

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