As this year's July 15 tax deadline approaches, some Americans will be bracing for an IRS bill. Most, however, will likely be getting a refund.
The average refund this year so far has been $2,767, and given the number of people who are struggling because of COVID-19-related job loss, this isn't the year to let that money go to waste. Here are a few important things to do with that cash, especially in light of the current recession.
1. Pad your emergency savings
Under normal circumstances, an emergency fund with three months' worth of living expenses is acceptable. But because we're in a recession, there's a greater need for near-term cash, and so you're better off having six months' worth of essential expenses tucked away in savings. If you're not there, that's probably the single most important thing to do with your refund.
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2. Pay off costly debt
Unhealthy debt -- that of the credit card variety -- can cost you a lot of money in interest, and the sooner you pay it off, the more money you'll save. Also, not having an extra payment hanging over your head could alleviate a world of financial stress if you are laid off in the coming months. As such, it pays to use your refund to knock out some debt -- especially if you're carrying a lot of it.
3. Contribute to your IRA or 401(k)
Many people have put their retirement savings on hold this year, and have instead focused on amassing cash for emergency purposes. That's not an unwise thing, but if you had to hit pause on your IRA or 401(k) contributions, your refund could be your chance to catch up. And remember, if you put money into a traditional IRA or 401(k), you'll get an immediate tax break, thereby increasing your chances of getting a refund when you file your next return.
4. Buy some stocks
It's natural to shy away from stocks during a recession, but now's actually a good time to be on the lookout for quality investments that can be bought up at a discount. It pays to put your tax refund into a brokerage account so you have cash at the ready in case a great deal pops up.
5. Put the right insurance in place
If you're among the many Americans without a life insurance policy, and cost has been the barrier, your tax refund may help you rethink that. Unfortunately, COVID-19 has taught us the hard way that life can change in an instant, so if there are people who stand to get hurt financially if you were to pass away, use your refund to buy a term life policy, which will buy your loved ones protection for a preset period of time (a 30-year term policy, for example, gets you 30 years of coverage). Along these lines, if you don't have the most comprehensive auto or homeowners insurance, you might look into getting a new policy -- one that offers better protection and does a superior job of minimizing your financial risk.
6. Do some estate-planning
Though creating a will isn't a fortune, if you use an attorney to put one together, you could spend several hundred dollars -- more, if your estate is complicated. If you've been putting off that task, now's the time to stop avoiding it, especially if you have cash from a tax refund to cover your costs. Along these lines, you might consider sitting down with an estate-planning attorney to see if a living trust is right for you.
7. Invest in tools that make it easier to work from home
Millions of Americans have been forced into a remote work setup because of COVID-19. But if you suddenly went from working in an office to working from home, there's a good chance you may be missing some essential tools to do your job effectively and comfortably -- things like a supportive desk chair, a monitor that's easy on the eyes, or a standing desk that allows you to stretch while you do your job. If you use your tax refund to invest in some of these tools, you may have an easier time getting work done in the coming months. And let's face it: There's a good chance a lot of workers will remain remote for the remainder of the year.
8. Be charitable
At a time when so many people are having a hard time making ends meet and good organizations are lacking the funding to help, it pays to give away some of your tax refund if you can afford to do so. For one thing, it could serve as a tax break if you itemize deductions on your 2020 return. But also, it's something that ought to make you feel good, and at a time like this, there's value in that.
Not everyone will be getting a tax refund this year, but if you have one coming, be sure to make the most of it. That said, if there's a small indulgence that will bring you joy in the coming weeks -- a $20-a-month book club subscription or a $100 pass that buys you unlimited outdoor yoga classes for the summer -- then you shouldn't feel guilty about spending a portion of your refund, either. These are tough times, and while you should take measures to protect your financial health, a modest investment in your mental health is wise as well.
