Some taxpayers dread what they might owe at tax time while others are so excited that they spend their refund before it hits their bank account.
There are a lot of smart uses for a tax refund — but sadly, just as many terrible ones.
Following are some of the worst ways to use that money.
1. Putting it on a prepaid debit card
One way financial companies get their grubby fingers on a piece of your tax refund is by catering to impatience. They offer what’s called a “refund anticipation check” or “refund advance loan.”
Tax preparers, for instance, might offer you an amount based on your estimated refund, minus their preparation service charges and fees. The fees for this type of loan can be as high as $50, the Consumer Financial Protection Bureau says.
They may also require or encourage you to put the money on a prepaid debit card. H&R Block offers this option with the Emerald Prepaid Mastercard. Once you have the card, you’ll need to pay $4.95 for cash reloads, $1.50 to check your balance on an ATM and $3.00 to withdraw cash from an out-of-network ATM. And if you want to save that money for a future purchase? After 60 days of inactivity, your account will be charged $4.95 monthly.
By the way, the fastest way to get your tax money? Not giving it up in the first place — you can do that buy adjusting your tax withholding and having less taken out of your paycheck throughout the year.
2. Gambling with it
There are ways to turn your tax refund into a bigger pile of money, but gambling is kind of a lose-lose situation.
Aside from being a risky and potentially addictive pastime, gambling winnings are taxable income. Even if you hit the jackpot, you’ve just used your tax refund to trigger a second round of taxes on the same money next year.
But what about losing and then claiming a tax deduction? That is an option, but a poor one. The tax deduction for gambling losses is only available to those who itemize their deductions. Most taxpayers — around 88% — claim the standard deduction instead of itemizing because it’s easier and more valuable to them.
3. Putting it down on something you can’t afford otherwise
It can be tempting to look at a tax refund as a lottery win in miniature: basically free money you can do whatever you want with. And unlike the lottery, you earned it, after all — so why shouldn’t you splurge with it? A giant new TV or tropical vacation sounds nice.
That’s not the wisest thing to do, but it’s undeniably fun. However, be wary of using a tax refund as a partial payment on a big-ticket item. This is money you’ll only see once a year, and you can’t be sure you won’t get a smaller refund — or no refund at all — next year. Can you keep up on payments?
The bottom line is, if you couldn’t afford it before your tax refund, you likely can’t afford it with one either. For one exciting moment, it just seems like it — when actually you’re getting into debt.
4. Investing in whatever seems to be hot
Investing your tax refund can be a great boost to your retirement, and you’ve probably heard this recommendation somewhere before, but that’s only if you do it right.
If you fail to do your research and just buy whatever stock is doing great the day you get your refund, you’re begging for trouble. Deciding to try out day trading is even worse. As Money Talks News founder Stacy Johnson says in “5 Mistakes That Will Ruin Your Investment Returns“:
“Taking a short-term approach — such as day trading or holding stocks for very short amounts of time — is exceedingly risky. Nobody knows what’s going to happen at any given hour or day.”
If you want to spend the money investing, take it slow. Consider buying a book on investing, or taking a course, and give yourself the foundation you need to succeed.
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