Don't Fritter Away Your Tax Refund

(MarketWatch)  So you're one of the lucky taxpayers receiving an income tax refund this year? The IRS estimates that the average refund will be $2,548. While it's tempting to spend that chunk of change on a plasma-screen TV or a fabulous vacation, consider using it to firm up your financial future.

Bill Stroh, co-CEO of Bills.com, says that "many tax refund recipients dream of ways to spend that cash. But before getting carried away in a spending fantasy, think long-term. A tax refund is not really a windfall, but a return of your own money to you. Tax refunds are a forced savings plan from the IRS ... not a gift. That shift in your mind may make it less likely that you will squander the refund."

Here's how you can spend your refund wisely:

Pay down debt. Use the refund to get rid of high-interest debt, such as credit-card balances. Stroh also suggests slashing your mortgage and car payments.

Create an emergency fund. You should have six- to nine-months' worth of living expenses in your fund. Your refund can provide a good foundation.

Buy insurance. If you're not covered adequately with the proper health, auto, home or renters insurance, now is the time to get it.

Save for retirement. Stash some of your refund into your 401(k), Roth IRA or other retirement-savings plan.

Put the money back into your home. Take care of minor and major home maintenance so that you don't have to deal with bigger, more costly problems later.
By Marshall Loeb

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Why wait for your refund? What if you could get your hands on next year's refund right now, by filling out one simple little form? Don't believe it?--keep reading.

Taxpayers who receive refunds are not lucky--they're misguided. A refund is not a gift from the Feds; it's your money that your preparer caused you to overwithhold from your paycheck in order to sell you a "refund anticipation loan" at tax time. Fortunately, there is an alternative.

#1: Fire your preparer if your refund is more than $300 or 3 percent of your income, whichever is greater.

#2: Find a competent professional who can make an accurate estimate of your 2007 tax liability. If you don't know where to look, try www.CPAwho.com, where you can ask a question for free.

#3: Have your CPA help you complete a new Form W-4. Submit this to your employer and if you're "average", you should see an immediate increase of $200 or more in take-home pay.

#4: Use your CPA to set up some type of automatic saving & investment plan.

By this time next year, you will not owe any additional tax payments. Your "refund" will already have been received and increased through wise investment. You will avoid the insane fees and interest charged for refund anticipation loans. Best of all, your tax return will have been prepared by a competent professional & not some part-time housewife or student trying to make a few extra bucks during tax season.