Using your Tax Return Wisely

As you organize your documents in preparation for tax day, you may be dreaming about spending your tax refund on a trip, a new TV or a new computer. Although it may be tempting, using your refund wisely and practicing some good-sense tips will help you get closer to your financial goals and a fit financial future.

“The first step before using your tax refund should be to make a list of priorities,” said Joe Herndon, GreenPath group manager and financial counselor. “If you have a significant other, you should make separate lists and then combine them into one, making sure you agree on the ranking of those priorities.”

Discuss with your partner how these priorities relate to your current financial situation. “If you are struggling with your home budget and have been unable to save any emergency funds, it would be wise to put some of the money into savings and use the rest to pay off debt,” Herndon remarked.

Here are some additional ways to use your refund wisely:

• Pay down your credit card. Use your refund to pay the highest interest rate obligation. If you can wipe it out completely, even better. 
• Set up an emergency fund or add to your current one. Your goal is to save enough to cover three to six months worth of critical expenses. 
• Pay off any late utility or housing expenses. 
• Pay periodic expenses. Get a head start on expenses that arise once or twice a year, such as insurance premiums, property taxes, and automobile registrations. Tax refunds can be used to pay these expenses or put into a savings account for when they are due. 
• Pay extra on your mortgage. Using your refund to reduce your mortgage debt can lead to long-term savings. You will pay your mortgage off faster and pay less in interest. 
• Fix up your home. Increasing the value or safety of your home adds quality to your life. 
• Service your car. Make certain you have reliable transportation; don’t put off that tune-up or oil change. 
• Start investing. People often mistakenly believe that they need a large amount for an initial investment. 
• Fund your children’s education. Putting money into an education savings plan will allow you to lay the groundwork for your child’s college education. 
• Expand your horizons. Take a course, start an education fund, or train for something that will help you get ahead at work.

If you’re disappointed with the advice because you really wanted to treat yourself or your family to something special, don’t despair, compromise! Consider spending 80 percent of the refund wisely and splurging with the remaining 20 percent. Turn a week-long vacation idea into a nice long weekend away, a fantastic night on the town, or a day at the spa. Also consider putting it toward a membership that your family can use for the upcoming year, such as a zoo or athletic club membership. You’ll feel good knowing you made a great financial decision, while still being able to enjoy yourself.

Although it is nice to receive a large refund, it really means that you overpaid the government through the taxes withheld from your paycheck. You may want to consider changing the number of exemptions on your W-4 Employee’s Withholding Allowance Form. Making this change will add a little bit extra to your paycheck each month. But make sure to use this money wisely, rather than spend it frivolously. Putting it toward debt, building your emergency fund or contributing more to your retirement will positively contribute to your financial future.

Know the Facts about the Earned Income Tax Credit

GreenPath recognizes that many people today are experiencing financial difficulties. The Earned Income Tax Credit (or EITC) is a tax credit you may wish to consider to help reduce your taxes while increasing your chance of receiving a refund.

What is the Earned Income Tax Credit?

The EITC is a tax credit for working individuals and families who make less than $48,000 a year, depending on filing status and the number of qualifying children in the household. Depending on income, the EITC can offer a refund of up to $5,657.

Why is the EITC important?

Each year, families substantially increase their annual income by utilizing the EITC. In fact, the EITC lifts more families out of poverty than any other federal aid program. It plays a crucial role in helping families get on the right financial footing.

How can I use the EITC?

There are countless ways to use your EITC, but here are a few that will help you become financially stable: 

• Pay down your debt 
• Provide basic necessities for your family (food, clothing, shelter, medical care) 
• Open a savings account or contribute to one you currently have

Who can get the EITC?

• The EITC is based on adjusted gross income (AGI). The following groups qualify:
• Families with three or more qualifying children with an AGI of $43,279 ($48,279 if married filing jointly) 
• Families with two qualifying children with an AGI of $40,295 ($45,295 if married filing jointly) 
• Families with one qualifying child with an AGI of $35,463 ($40,463 if married filing jointly) 
• Families with no qualifying children with an AGI of $13,440 ($18,440 if married filing jointly)
• Expanded benefits are now available for married couples and those with three or more qualifying children for the 2009 and 2010 tax returns. For more information, visit http://www.eitc.irs.gov/central/Preview2009/.

How do I get this tax credit? 

File taxes with FREE professional assistance: Free tax preparation assistance may be available at locations throughout your region. Call the IRS at 1-800-906-9887. 

File taxes on your own, via paper return: Complete the Schedule EIC in the Federal 1040 or 1040A return. 

File taxes on your own, via online return: The Free File program provides free federal income tax preparation and electronic filing for eligible taxpayers through the IRS. To get started, visit http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=7.

For more information on the EITC, visit http://www.eitc.irs.gov/central/main/.

2009 Tax Law Changes Provide Saving Opportunities

According to IRS.gov, in 2009 there are numerous new and expanded deductions and credits for a broad cross-section of taxpayers. Following is a summary of a few key changes you will find as you prepare your federal income tax returns.

1. American Opportunity Credit: More parents and students can use a federal education credit to offset part of the cost of their first four years of college.
2. Energy Improvements Qualify for Expanded Tax Credits: People who weatherize their homes or purchase alternative energy equipment may qualify for a home energy tax credit. 
3. New Vehicle Purchase Incentive: New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. 
4. Tax Credits Increased for Low and Moderate Income Workers: The EITC is a tax credit for taxpayers whose incomes are below certain income thresholds. 
5. Standard Deduction Increases for Most Taxpayers: The basic standard deduction increases range from $250 for singles and married individuals filing separate returns to $500 for married couples filing a joint return and qualifying widows and widowers. 
6. Unemployment benefits up to $2,400 received in 2009 are tax free. Every person who receives unemployment benefits can exclude the first $2,400 of these benefits on their return. Unemployment benefit amounts over $2,400 are taxed.

For more details about these and other tax law changes, visit www.irs.gov.