David Lerner Associates News: What Should You Do With Your Tax Refund?

David Lerner Associates News: What Should You Do With Your Tax Refund?

Core Facts

 [ What is this? ]



This spring, millions of Americans will rush to their mailboxes every day in search of their “gift” from the federal government, their income tax refund. Three out of every four Americans received a tax refund last year averaging about $2,700.

Many people view their tax refund as free money, but it’s not, notes John Dempsey, the president of David Lerner Associates. “A tax refund is your money that you essentially loaned to the government by having more tax withheld from your paycheck than was necessary.”

Responsible Refunds

The good news is that the majority of Americans plan to put their tax refund this year toward a responsible financial goal, according to a recent survey conducted by Fidelity, by either saving it or using it to pay down debt. One-third (33 percent) say they will use their tax refund to pay off debt (including high-interest credit card debt), 15 percent will save it for retirement, 9 percent will save it for college, and 22 percent will save it for some other purpose.

Only 2 percent say they plan to spend their tax refund on a vacation, a typical splurge toward which tax refunds are often applied. Dempsey believes that these survey results may be a result of the lingering effects of the impact of the financial crisis on many Americans’ financial behavior.

He uses the following example to illustrate the potential long-term financial benefits of investing, instead of spending a tax refund. Suppose you receive the average tax refund of $2,700. If you invested this in your 401(k) plan and earned a 6 percent average annual return (compounded annually), your money would grow to more than $15,500 in 30 years. “This represents a pretty good long-term return on your tax refund dollars for many people,” says Dempsey.

Better Than a Refund

While saving or investing your tax refund or using it to pay down debt are usually wise financial moves, the smartest move may be to not receive a tax refund in the first place. Remember, a tax refund is income taxes that you overpaid to the government — in effect, an interest-free loan.

Instead, you can increase your take-home pay by asking your payroll department to adjust your tax withholding so that the right amount of federal income taxes are withheld from your pay each pay period. For example, if you receive the average federal income tax refund of $2,700 and get paid every other week, you could increase the size of each paycheck by about $104 by adjusting your federal withholding.

Some experts recommend adjusting withholding so that federal taxes are slightly overpaid at the end of the year. This will hopefully avoid underpaying your taxes and owing money in taxes and penalties when you file next year, and should result in a small refund.

Tracking Your Refund

If you’d like to follow the status of your income tax refund, follow these 4 steps outlined by TurboTax:

1. Assuming you e-file your tax return, you can start checking the status within 24-48 hours using the IRS Where’s My Refund online tool (http://www.irs.gov/Refunds).

2. The tool should indicate that your return has been received within 24-48 hours after you e-file. It will be listed as “Return Received.”

3. The status of your refund will change from “Return Received” to “Refund Approved” once the IRS has finished processing your return. At this time, it will also give you an estimated refund date. More than 90 percent of tax refunds are issued by the IRS in 21 days or less.

4. Once your refund has been sent, the status will change to “Refund Sent,” either via a check in the mail or a direct deposit to your bank. A check could take several weeks to arrive, while a direct deposit may take up to five days to appear in your account.

David Lerner Associates does not offer tax advice. You should consult with a tax professional for guidance in your specific situation.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC



^ Top


Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1-800-367-3000.  Visit the website http://www.davidlerner.com

^ Top


Jake Mendlinger
Account Manager
516.829.8374 X 232

^ Top