Tax Season is over: Tax Refund suggestions
A survey released by BMO Harris Private Banking says 56% will do the “responsible thing” and use their use their tax refund either to pay bills and credit card balances or invest.
“This tax season, it’s all about doing the responsible thing,” said Sara Plant, vice-president and national director, wealth services with BMO Harris Private Banking. “These results really speak to the character of Canadians and the importance they place on financial responsibility.”
Canada Revenue Agency said in the 2008 tax year the average tax refund exceeded $1,400.
If you consider that any amount of refund that you receive on filing of your annual tax return is more or less a refund of the tax you prepaid via source deductions on your pay cheque, then it only makes sense to integrate this cash back into your financial plan whatever that might be.
It is important to do a post tax season analysis of your tax return to determine if you can minimize the amount of tax taken at source in the coming year based on expected availability of tax credits. The idea here is that you want to keep as much of your cash in your pocket as possible rather then prepaying the government and waiting a year to receive the refund of the overpayment.
Listed below are a number of prudent things that you can do with your tax refund but in general it is important to stick to your personal financial strategy. Therefore, if you had X number of dollars in your hand at any point in time what would you normally do with it? Once you have answered this question then dealing with the refund should be simple.
Life happens, and building a savings account with three months of living expenses on hand will help you to deal with the unexpected. With a tax-free savings account, you can grow your savings without paying any tax on the interest you earn. When an emergency arises and you don’t have the cash available to pay for it, you will likely use credit.
The only way to not end up in debt is to have the money set aside for spending when you least expect to need it.
Paying down credit card debt
Paying $1,000 off on an existing credit card balance with a 19% interest rate will save you close to $200 a year.
Boosting retirement savings
Contributing as much as you can to an RRSP is always a good idea, especially if you tend to owe money when you file your taxes. Go one step farther and make regular monthly contributions to your RRSP and ask your employer to reduce your income tax rate to account for the contributions. This will make it easier to save.
Add to your children’s education plans
Depositing funds into a Registered Education Savings Plan (RESP) will help fund your child’s post-secondary education and qualify you to receive a Canada Education Savings Grant. The plan will earn tax-free investment income based on the money you contribute and the money received from the education grant.
Savings for home improvements
Look around your home. What projects would you like to tackle in the coming year or two? The cost of home improvements increases if you need to rely on a line of credit to pay for the work.
These are just a few ideas to help you get great value from your refund. It’s easy to lose sight of the fact that an income tax refund isn’t free money from the government.
The bottom line is that you work hard for your money and your money should work every bit as hard for you.
- The case for blowing your tax refund (opinion.financialpost.com)