Saving can help you prepare for emergencies and start planning for the future
Many hard-working people feel like they just can't get ahead when it comes to money. What they may not know is that saving during tax season can help them start on the path to financial security.
It can be difficult to save throughout the year. Sometimes it feels like every paycheck is gone before you get it thanks to bills and other expenses. Some people may not have access to easy methods of saving, such as a separate savings account or direct deposit for their paychecks.
These people are not alone. In 2016, the Federal Reserve Bank issued a report showing that 46 percent of consumers said they either could not pay a $400 emergency expense or would need to borrow or sell something in order to do so.
Consumers are urged to take advantage of tax season to prepare for unexpected emergencies or plan for the future. Below are some tips to help get started.
Why Save During Tax Season?
Tax time may not be the first time of the year to come to mind when thinking about saving. However, there are three reasons why this season may actually be one of the best times of the year for it.
- If you receive a refund, it might be the largest lump sum that you get all year.
- You can save when you file your return by filing electronically and having your refund directly deposited.
- You can help yourself get ready to deal with unexpected expenses by setting money aside in a separate account.
This is particularly true in cases in which consumers have paid more in taxes than they owe throughout the year and if they are eligible to get refundable tax benefits like the Earned Income Tax Credit.
This is a simple and automatic solution that helps you receive your refund fast and safely.
This is also a good way to begin to meet long-term financial goals, such as saving for retirement.
What Do I Need to Do To Save at Tax Time?
See below for tips on how to start saving using your tax refund.
- Plan ahead of time to save a certain part of your refund. You probably already know what you're going to do with your refund. Keep in mind, however, that if you include a plan to save part of the refund, it may help you down the road in the event of an emergency or if you need a bit of extra cash to meet a financial goal.
- Open a separate account to save. You have many options to choose from when it comes to separate accounts for savings, including regular savings accounts with banks or credit unions, IRAs, savings bonds, or savings wallets on prepaid cards. There are also government-sponsored retirement savings accounts known as myRA accounts, which are easy, safe, and affordable. Look over your options and choose the most convenient method of setting aside your savings. Then set it up ahead of time so you'll be ready to use it during tax season.
- Automatically deposit part of your refund into a separate account when you file your return. If you're getting a refund, use the tax form to instruct the IRS to deposit the part that you will need immediately into your checking account and the rest into your separate account for savings. If you use the services of a professional tax preparer or free tax preparation site, don't forget to take your savings account information with you.
How to Get the Most Out of Your Refund
Following these simple steps can help make sure you receive every dollar that you're eligible for from your tax refund.
- If you earn $54,000 or less, if you are 60 or older, if you have a disability, or if you speak limited English, you can usually receive free tax preparation help at a Volunteer Income Tax Assistance (VITA) location.
- The IRS and the armed forces also participate in the VITA program, which provides free tax advice and preparation, return filing, and other tax help to members of the military as well as their families.
- If you earn $64,000 or less, you can use any of the major tax preparation software products offered through the IRS Free File Alliance to prepare and file your return for free. If you earn more than $64,000, you can still download free tax filing forms through the IRS.
Keep an Eye Out for Possible Tax Fraud and Scams
Tax-related identity theft, in which someone steals your Social Security number and uses it to file a tax return claiming a fraudulent refund, is becoming more and more common. The IRS is carrying out a number of steps to reduce identity theft.
You should also learn about how certain tax credits can delay your refund and how you can manage that delay.
Whether you're just starting out on the path to saving or are trying to reach a long-term goal, planning to save during tax season can help.