Anton27 / Shutterstock.com
Some taxpayers fear what they might owe by tax time, while others are so excited they’re spending their refund before it reaches their bank account.
There are many clever uses for a tax refund – but unfortunately just as many terrible ones.
Below are some of the worst ways to use that money.
1. Top up to a prepaid debit card FXQuadro / Shutterstock.com
One way financial companies get their dirty fingers on a portion of your tax return is by satisfying impatience. They offer what is called a “Refund Anticipation Check” or “Refund Advance Loan”.
For example, accountants may offer you an amount based on your estimated refund minus their preparation fees and charges. 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 transfer the money to 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 top-ups, $1.50 for checking your balance at an ATM, and $3.00 for cash withdrawals from an off-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 per month.
By the way, what’s the quickest way to get your tax money? Don’t give it up in the first place — you can do that by adjusting your tax deduction and taking less from your paycheck throughout the year.
2. Gamble with Massimofusaro / Shutterstock.com
There are ways to turn your tax refund into a bigger cash pile, but gambling is a lose-lose type of 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 if you lose and then claim a tax deduction? It’s an option, but a bad one. The gambling loss tax deduction is only available to individuals who itemize their deductions. Most taxpayers – about 88% – claim the standard deduction instead of itemizing it because it’s easier and more valuable for them.
3. Bet on something you couldn’t otherwise afford Standret / Shutterstock.com
It can be tempting to think of a tax refund as a lottery win in miniature: essentially free money to do with as you please. And unlike the lottery, you deserve it after all – so why not splurge on it? A huge new TV or a tropical vacation sounds good.
It’s not the smartest thing, but it’s undeniably fun. However, be careful when using a tax refund as part payment for a large item. This is money you only see once a year, and you can’t be sure you won’t get a smaller refund – or a refund at all – next year. Can you keep up with the payments?
The bottom line is, if you couldn’t afford it before your tax refund, you probably can’t either. For one exciting moment, it just seems that way — when you actually get into debt.
4. Invest in things that seem to be trending Chaay_Tee / Shutterstock.com
Investing your tax refund can significantly improve your retirement, and you’ve probably heard this recommendation before, but only if you do it right.
If you don’t do your research and just buy the stocks that are doing well on the day you get your refund, you’re begging for trouble. Deciding to try day trading is even worse. As Money Talks News founder Stacy Johnson says in 5 Mistakes That Are Ruining Your Investment Returns:
“A short-term approach — like day trading or holding stocks for a very short time — is extremely risky. Nobody knows what will happen at any given hour or on any given day.”
If you want to spend the money on investments, take it slow. Consider buying a book on investing or taking a course and give yourself the foundation you need to be successful.
