Paying income taxes is never fun, but there’s a silver lining when you get money back. The average tax refund fluctuates from year to year, but lately it’s been in the neighborhood of $2,700. That’s a nice neighborhood.
An extra $2,700 from the IRS can do a lot of good around the house, from insulating an attic to making over a dated bathroom. It can also pay down high-interest debt, or help you get ahead on mortgage payments. How do you decide?
Alan D. Kahn, a CPA in Syosset, N.Y., offers tips for investing a tax refund in your home. Depending on your life stage and financial circumstances, sometimes it makes sense to invest the money in home-related projects. Other times, the best investment you can make in your home is not investing in it at all.
HouseLogic: What should be your priority if you get a $2,700 refund?
Alan Kahn: No matter what your situation, first and foremost, if you have credit card debt, pay it down. That’s the one item that’s creating financial havoc throughout the country. In fact, the enormous interest payments may ultimately affect your ability to meet mortgage payments.
Although you may be tempted to put a refund in a retirement account, and just continue paying the credit card minimum each month, retirement accounts may not be earning much. However, your credit card company may be charging 15% or more. The best thing to do is get rid of that noose.
HL: What’s the next priority?
AK: Use the refund to create, or add to, an emergency fund, to cover something like a new hot water heater or leaky roof. You need a liquid account you can access quickly.
After that, it all depends on where you are in your life and with your home. For instance, you might want to put money away for your retirement.
Also, some may think, “Now I can afford the life or home insurance I knew I should have,” but this is poor reasoning: You should have that anyway, not wait for an IRS windfall.
HL: What about settling non-credit card debt, such as getting ahead on mortgage payments?
AK: This is a little trickier. If you’re fairly young and have many years ahead at a low fixed rate, in the 4% to 5% range, don’t bother with early repayments. But if you’re older and the end is in sight, it can be nice to own your house outright. It gives you a future pool for a loan you may need later, or a reverse mortgage. Some may say you shouldn’t have money tied up in your house, but I say, “Don’t feel this is bad!” You can get more liquidity later, if you need it.
HL: What about HELOCs?
AK: Many home owners have taken out home equity lines of credit or similar second-mortgage products. These usually give you a tax break and tend to have a low interest rate, so again, you probably don’t need to use a refund to pay these down, unless they’re very high.
HL: How about using the refund to improve your house and make it more valuable?
AK: If you’re thinking of selling your house in the near future, you can use a refund to help with a remodeling job that you may get back later in the form of a higher selling price. An extra bathroom may make a house more saleable in a tough market.
But don’t think too much in the long term. If you’re planning to spend many years in your home, it’s too early to think about the future [sale of it]. Of course, you can still make a home improvement, but it should be something that makes you happy, not some far-distant buyer.