The Best Ways to Use Your 2022 Tax ReturnMarch 20, 2022
While tax season is rarely anyone’s favorite time of the year, getting a tax return tends to be a silver lining for many people, especially with record high inflation numbers in 2021. This year 77% of Americans are expected to receive a tax return. If you fall in that category, you may be wondering what the best way for you is to personally invest to build financial health and stability.
While there is no one right way to use your tax return, taking the time to understand your options is pivotal to setting yourself up for success.
5 best ways to use your 2022 tax return
Here are the 5 best ways to use your 2022 tax return.
- Pay down/pay off debt. In 2021, Americans across the country owed roughly $807 billion dollars in credit card debt. So if you’re someone who lives with credit card debt, know that you’re not alone. In fact, it could be argued that it would be more difficult to find friends who aren’t in debt of some sort than those who are. Instead of feeling shame around this, make a plan to use at least a portion of your tax return to pay down your bills. Whether it be credit card debt, student loan debt, or medical bills, creating a plan to pay off what you owe is a great way to take your power back. Dave Ramsey, a guru in the personal development space for helping individuals and families get out of debt once and for all, suggests using the snowball method. In short, the snowball method is a great tool as it helps you pay off small pieces of debt quickly and therefore, helps you build momentum and stay motivated until your debt is paid off in full. For more information on the specifics of the snowball method, click here.
- Create or add to your emergency fund. It’s important to have an emergency or “rainy day fund” in case of the event you lose your job, get sick or hurt and not be able to work for some time, or lose a loved one who supported you financially. Your tax refund can help you do that. A good starting point is to build an emergency fund of $1,000 and work your way up to having a cushion that could support you and all of your important bills for 3-6 months’ time. If you have dependents, it’s crucial to factor in their necessary expenses as well. Considering learning more about high-yield savings accounts where your emergency fund can earn slightly higher interest rates than a normal savings account.
- Invest in your future. Your tax refund can also be used to contribute to your retirement plan like a 401(k) or IRA. In 2022, you can contribute up to $20,500 to a 401(k) and $6,000 for traditional and Roth IRAs. (If you’re over 50, you can contribute an extra $6,500 to your 401(k) and $1,000 to an IRA.) If your employer matches your contribution up to a certain percentage, it’s a great idea to take advantage of that as well.
If you feel comfortable in what you’re already contributing to your retirement fund you can also use your tax refund to begin investing. Index funds and ETFs (exchange traded funds) are a good long-term play to consider. You can also invest directly into the stock market if you’re prepared to take on more risk.
- Add money to your HSA (health savings account) or FSA (flexible savings account). While it may not be as fun as investing in the stock market, using your tax refund to contribute to your HSA of FSA is a great option as these savings accounts are not taxed which allows you to save money on medical expenses like co-pays, prescription medications, and over the counter needs. Keep in mind, different states have different qualifying medical expenses that your funds can be used to purchase. The contribution limits for 2022 for an HSA are $3,650 for an individual and $7,300 for family plans. The FSA contributions limit for 2022 is $2,850.
- Donate to your favorite charity. Lastly, you can use your tax refund to donate to a charity that is close to your heart. If you’re someone who lives debt-free, feels comfortable with your emergency fund, and is looking to give back to those less fortunate, making a donation is another wonderful option. As we all continue to navigate the Covid-19 pandemic and its aftermath, there is no shortage of problems people are facing. Ask yourself what issues you are most invested in and begin to research charities and organizations doing work to help out.
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No matter which option you choose, be proud of yourself for building or continuing to build wealth. By investing in your own prosperity or the prosperity of others, you’re helping the world become a better place.