SPENDING | JUN 22, 2022

Uncle Sam Pays Interest and What To Do With It

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Rob West & Jim Henry

Uncle Sam charges you interest when your tax payment is late, but that works both ways. The IRS has to pay you when they’re late getting your refund check out.

For a variety of reasons, the IRS is further behind than usual getting refund checks out this year. The agency says it’s having trouble hiring enough workers to catch up on the 2020 backlog from COVID and it’s had to implement tax changes made in COVID-19 stimulus legislation.

The result is a delay in getting millions of refund checks out to taxpayers, but the good news is, if your check is more than 45 days late, the IRS will pay you interest on the total amount of your check.

Right now, interest is accruing at 4%, but starting July 1st, the rate the government will pay you goes up to 5%, compounded daily.

Of course, your refund and any interest the IRS pays you is taxable, so you need to account for that.

When your refund check finally arrives, or if it has already and is still in your bank account, what will you do with it?

Unfortunately, many folks who get big refund checks view it as “mad money” that’s outside the budget, so they tend to spend it frivolously. A refund check, however, presents opportunities.

If you haven’t started an emergency fund, that’s the first thing to do with your refund check, or add to it if you have one already. You want 3 to 6 months’ living expenses in liquid savings and your tax refund can be a great jumpstart. Your emergency fund allows you to handle life’s unplanned but inevitable expenses without having to borrow.

The free MoneyWise app can help you get on a budget and track your expenses so you can see how much discretionary income you have for saving. Get it wherever you get your apps; just search for “MoneyWise biblical finance.”

If your emergency fund is in good shape, next tackle any outstanding debt. It’s the best “investment” you can make with your refund. It gives you a guaranteed “return” on your money equal to the interest rate you’re paying to the credit card company, which is probably a lot. If the refund won’t cover all of your debt, pay down as much as you can.

The next best thing you can do with a tax refund is to start saving for retirement. Think of it as finally getting your money to work for you, instead of you always having to work for your money.

If back in 2012 you had put your 3-thousand dollar refund into an S & P 500 index fund in a qualified retirement account, today that $3,000 would be almost $12,000.

That’s the power of compound earnings and granted, the stock market did incredibly well over the last 10 years. The S&P 500 enjoyed a 14.7% average annual return. You won’t always have returns like that, but historically, there’s no better way to create wealth than by investing broadly in the market over a long period of time.

If you have saving, debt reduction and investing covered, the next best thing to do with a refund might be home repairs and improvements, if they will increase property value. Keep in mind that not all improvements are worth the money, so do some research. Realtors are always a good source of information.

The next best thing is investing in yourself. Use your refund to get more training, take a job-related course, attend a conference or join a professional organization. Those things can pay off down the road with promotions and greater job security.

Giving is one more important thing you can do with your refund and it certainly shouldn’t be an afterthought. Does this extra cash enable you to be more generous? Take the opportunity to give something more to your church or to further God’s Kingdom in other ways.

Those are the smartest things you can do with your tax refund, whether Uncle Sam is paying you interest or not. We hope you’ll take advantage of them.

You can also listen the related podcast on this topic.

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