Mother’s Day is almost upon us, and it brings to memory the story of Michael Klingebiel of New Jersey who, several years ago, reneged on an agreement with his mother to share any lottery winnings with her. He won US$2.15-million but claimed that the particular lottery was not part of his deal with his mother. So, his mother sued him. He reluctantly agreed to give her 22.5 per cent of the winnings after their lawyers got together to settle the matter. Lottery winnings can make people act in crazy ways.
Tax refunds are a little like lottery winnings (just don’t let it spoil your Mother’s Day weekend). According to the taxman, 64 per cent of tax filers last year received a refund, and the average amount was $1,650. What are you going to do with that money? Here are the top 10 uses of a tax refund this year.
1. Buy your mother a gift. You’ll never have an excuse to forget Mother’s Day if you use your tax refund to buy her a gift. File your return electronically by April 30 each year and you should have the funds in your hands in time to make your mother happy.
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2. Pay down your credit cards. With most credit cards charging 19-per-cent interest or more, paying down this debt should be a top priority. Assuming your credit card interest is not deductible for tax purposes, then paying off a dollar of this debt will net you a 19-per-cent (or whatever rate applies to your card) after-tax rate of return.
3. Pay down your other debt. Certain debt is worse than others. High-interest debt, such as your credit cards, is worst – particularly if you can’t deduct the interest (you can only claim a deduction if you borrowed for the purpose of earning income from a business or property). Paying down your mortgage is always a good idea even if the interest rate is lower. Qualifying student loans can provide a tax credit for the interest and should probably be paid off last, depending on the rate of interest.
4. Build an emergency fund. It’s always a good idea to have three months of spending safely tucked away in a savings account to get you through unexpected costs. A tax refund can help to build that emergency fund.
5. Save for a child’s education. If you use your refund to contribute to a registered education savings plan, you’ll manage to multiply your savings thanks to the Canada Education Savings Grants in which the government will pay into the RESP along with your money. That grant will be 20 per cent of your contributions up to $500 per beneficiary for a particular year (to a lifetime maximum of $7,200 a child). The grants could be a little higher if your income is below about $46,000.
6. Contribute to a registered plan. Contribute your refund to your registered retirement savings plan or tax-free savings account and you’ll only improve your retirement picture. The RRSP, of course, can offer a tax deduction for the contribution that may help to get you a larger refund next year; then you can do it all over again.
7. Take a course. Why not use your refund to expand your earning capacity, or simply enrich your learning? Using the funds to take a course that could improve your job prospects, or increase your utility to your current employer, could be very worthwhile (your employer may even reimburse you for the course – just ask).
8. Invest in your home. Turn your refund into greater savings by replacing drafty windows and doors, adding insulation in the attic, or replacing appliances or lights with energy-efficient ones. Certain improvements, such as a new roof, can increase the value of your home and save you utilities costs.
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9. Help your children. When I bought my first home, my parents were kind enough to give me some money to help with the down payment. It allowed me to buy that first home, which has since turned into a much more valuable asset. Whether it’s helping with a home purchase, funding an education, or lending money to start a business, your children may appreciate the help.
10. Make a donation. Perhaps making a donation to charity should be top of your list – not last. Giving back helps those causes you care about and provides tax savings to boot. You’ll save up to about 50 cents in taxes for every dollar you give away (varies by province and income level), so the taxman is really partnering with you in your giving.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at firstname.lastname@example.org.