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Talking Tax Refunds, Rebates

If there's one part of the tax season that people actually look forward to, it's receiving that tax refund from the IRS! More than three-quarters of filers get them.

And this year, many filers will also be receiving economic stimulus checks from the government in the form of a tax rebate.

What should we do with the money?

Janice Revell, a senior writer of Money magazine, had some words to the wise on The Early Show Friday, in part two of our three-part tax series as the Tuesday deadline approaches.

Some 77 percent of tax filers receive a refund. The average amount received this year for last was $2,225.

But, says Revell, "You're usually better off not getting a refund. That's because the money you get back as a refund is money that could have been in your pocket throughout the past year. By waiting to get a refund, you essentially loaned your hard-earned money to Uncle Sam, interest-free.

"Instead of getting a refund, it would be far better to have that money in your take-home pay every month, where you can use it to pay down credit-cards or other debts, fund your 401(K) plan at work, or just pay your day-to-day bills."

Revell points out that, if you receive the average-size refund, it amounts to almost $200 a month extra that you could have had show up in your paychecks. That's a lot of money, particularly when everyday necessities such as gas and food are costing more and more.

She says that, if your tax refund is more than $500, you're having too much tax withheld from your paycheck. That's when you know you need to call your HR department and ask for a new W-4 form to have more taken out.

This year, tax payers will also be receiving an economic stimulus check from the federal government. Filing a tax return is what enables you to receive the check. If you don't file a return, you won't get the rebate.

Here's what you can expect to get:

  • If you're single and your adjusted gross income is $75,000 or less, you'll get $600.
  • If you're a married couple filing jointly and your adjusted gross income is $150,000 or less, you'll get $1,200. Plus, if you have children under the age of 17, you'll get another $300 for each child.

    If you exceed these income levels, your rebate will be less. If you have a six-figure income, you likely won't receive anything at all.

    "Also, if you owe any back-taxes, or if you are delinquent on student loans or child support payments, the IRS will reduce your rebate by any amounts that you owe," Janice points Revell notes.

    Of course the next thing people want to know is what's the fastest way to get their hands on this money?!

    Whatever you do, Revell says, stay away from refund anticipation loans! "What these loans do is give you an immediate cash advance on your tax refund," she explains. "But they come with sky-high interest rates and fees -- much worse, usually, than what you'll pay on even the highest-interest-rate credit cards. And you're paying those fees to borrow your own money!"

  • Instead, she advises, file your taxes electronically and ask for your refund to be deposited directly into your bank account. You'll usually see the money in less than two weeks. If you do that and file by the 15th, you can expect to receive your tax rebate some time between May 2 and May 16.

    If, for instance, you get the average rebate and the total possible rebate, that's a nice chunk of change!

    So, what would be the most useful thing to do with that money?

    "You don't have to deprive yourself completely of any fun," Revell responded. "Take 10 percent of your rebate and refund money and spend it on whatever you want. This is 'found money.' You work hard, and you deserve to treat yourself. So have some fun with that 10 percent, but then make sure you're putting the other 90 percent to work!"

    Of course the government is hoping you're going to spend your money to help stimulate the economy. But, Revell reminds viewers, it's precisely because the economy is on shaky ground that you don't want to spend it all; you need to focus on shoring up your own finances first.

    Here are three courses of action Revell suggests:

  • If you have high-interest credit card debt, attacking this should be your first priority. Plow most of your refund and rebate into that; you'll save yourself a ton of money in interest over the longer haul, and paying down the debt will give you a great feeling of accomplishment.
  • If you don't have any credit card debt, then your next priority should be to shore up your emergency fund. You should aim to have three-to-six-months' worth of living expenses set aside in case you lose your job. That's especially critical right now, given our weakening economy.
  • If you've got both of those things taken care of, then you should stash most of your rebate and refund money into a retirement account such as an IRA or 401(k). Most people are way behind when it comes to retirement savings, and this a great opportunity to get on track with this.