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Income Tax Refund: Save Or Splurge?

What do you plan to do with your tax refund?The grating starts in January.

“I’m getting $5,000 back and using it to go to Mexico!” a friend told me over dinner.

“We’ll get you the refund you deserve!” the commercial for the chain tax preparer screams at me through the television.

January starts tax refund season, with messages about bonuses and splurging and extra cash crashing against my eardrum until the last checks have been mailed in April.

(Today is Tax Day, so get on it, if you haven’t already.)

I hadn’t had a tax refund since 2005. My employer doesn’t take taxes out of my paycheck because I don’t work for a company. I work for myself.

So instead of the federal government handing me a fat check in April, I send in an estimated tax — four times a year.

I console myself with reminders of what’s great about working from home: sweatpants as office attire, running at lunch, typing with my dog in my lap.

Another benefit: I had a home repair done in February at a discount because the contractor’s other clients were waiting for their tax refund checks to move forward.

I also use logic to remind myself my friends aren’t getting a bonus.

They’re being handed back money they gave the government anyway. If they adjusted their withholdings, they’d have that money all year long.

What’s the big deal?

Then, I got back my 2011 taxes from my accountant.

I’d overpaid.

By a lot.

I was getting a refund.

Logic went out the window. The dog leapt off my lap.

A refund! A refund! I’m getting a refund!

I started looking at prices for flights to Mexico, jumped on to my favorite vintage website and ogled the $700 dress that had been out of my price range.

Well, it’s now in my price range — now that I’m getting a four-figure check back from Uncle Sam.

But after I’d signed my tax paperwork and paid my accountant, reason took hold.

I still hadn’t maxed out my Roth IRA for 2011, and I’d dipped into my emergency savings for a car repair.

I have vacation to pay for in August — the one already planned, not in Mexico.

So I was responsible and put the money away.

It’s not as exciting as a trip to Mexico or a new dress, but that refund will be worth so much more when I retire in 40 years.

And I’ve adjusted my payments for 2012 so I don’t get a big refund.

This was the smart thing for me to do. But what about you?

If you haven’t spent your tax refund yet, here are some ideas:

  • Top off your emergency savings.
  • If there’s one thing the recession taught us, it’s that we need to have money on hand to weather life’s nasty surprises.

    If you don’t have at least six months of living expenses put away, you’re walking a financial tightrope.

  • Pay down high-interest credit card debt.
  • If you’re paying 20% interest on your credit card balance, you’re throwing money away every month. Use your refund, or at least part of it, to pay down some high-interest debt. You’ll thank yourself later.

  • Fund your retirement accounts.
  • It’s never too early or late to start saving for retirement. The more you put away now, the more compounding can work in your favor and the less you’ll have to save overall.

    The annual Individual Retirement Account contribution limit is $5,000 for savers younger than 50 and $6,000 for those older than 50.

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