Managing a tax refund whether it’s $500 or $5,000, can have a positive impact on your personal and financial wellbeing.
Filing an annual income tax return allows you and the government to determine whether you have paid the amount of taxes owed. This process considers your income and allowed credits and deductions. Should not enough taxes be paid, we must send payment with our tax return. Alternatively, taxpayers who overpay taxes are due a refund from the government. This is the return of earned income to you. Once taxes are filed, you will find out if you have a tax refund and the amount.
Decisions around managing a tax refund should involve a money-smart plan that may include:

1. Start an Emergency Fund. Work towards having three-to-six months’ worth of living expenses in savings. Even an emergency savings of a small amount is proven to improve financial wellbeing.
2. Pay Down Credit Cards. Pay off one card or pay down the balances on multiple cards, prioritizing those with the highest rates, and experience savings from interest costs that you will avoid paying.
3. Make an Extra Mortgage Payment. Extra money you put toward your mortgage should go directly toward your loan’s principal to reduce the total amount you owe. You will have more equity in your home and pay your mortgage off a little sooner.
4. Fund Your Child’s 529 Plan for College. The 529 plan is a tax-advantaged method of saving for your child’s higher education cost.
5. Set Aside Money for Future Needs. Consider the possible needs and goals that you will encounter throughout all of 2023 before deciding how to use your refund. For example, you could set some money aside for car repairs or new tires, or for back-to-school or holiday expenses later in the year.
6. Consider ways your refund could help to build long-term financial security. These might include paying down high-interest debts, boosting your emergency savings, or setting some money aside for retirement or college expenses.
7. Don’t throw away part of your refund on loan fees. Companies that offer ‘quick refunds’ are just giving you a loan. It’s a high-cost, high-risk loan that could come back to bite you if your refund is held by the government to pay back student loans or other government debts.
   You and your family may benefit from having the use of this money throughout the year instead of waiting for the tax return. Consider reviewing your annual withholding amount. If you decide to change your withholding rate, submit a new Form W-4, Employee’s Withholding Allowance Certificate (https://www.irs.gov/forms-pubs/about-form-w-4) to your employer. Be sure to discuss changing the withholding rate with your spouse if you are married. Coordinate your withholding rates so you do not accidentally under-pay your taxes, which would cause your household to owe money the following year.
   For those who get big refunds, but experience extremely tight finances during the year, it sometimes makes sense to reduce the amount of tax that is withheld from your income. This reduces the size of the tax refund but offers larger monthly paychecks year ‘round. our tax situation is more complex, you will want to see Publication 505, Tax Withholding and Estimated Tax (https://www.irs.gov/forms-pubs/about-publication-505). If you identify a need to update your tax withholding, you can enter the results from the Tax Withholding Estimator in a new Form W-4, Employee’s Withholding Allowance Certificate (https://www.irs.gov/forms-pubs/about-form-w-4) and submit this to your employer. In this way you avoid under or over withholding income taxes
   Reminder that ISU Extension and Outreach specialists are available for individual financial consultations with Iowans who are working toward financial goals and would like some information, tools or strategies that would assist them. Contact me, Carol Ehlers, at 712-732-5056 or xehlers@iastate.edu for more information or to schedule an individual consultation.