I spent my last tax refund on vacation. here’s why
As a freelance writer, I’m no stranger to having to pay the IRS during tax season. Although I make it a point to pay estimated taxes on my income each quarter, it’s hard to get those exact numbers, especially since my income tends to fluctuate from year to year.
As such, the tax refund is a concept that I do not know very well these days. When I was an employee, I used to get regular reimbursements. But since I became independent many years ago, I constantly owe the IRS money.
One year, however, that was not the case. I don’t know how it happened, but between increasing my estimated quarterly payments, capping my pension plan contributions, and taking other strategic steps with the help of my accountant, I found myself ended up with a refund on their hands. It was shocking, in a good way. And I took the opportunity to splurge.
Here’s why I don’t regret it at all.
Found money for me
It’s a big misconception that a tax refund is free money. In reality, it is your money you earned but never received.
It’s for this reason that taxpayers are often advised to use their refunds strategically, whether that’s paying off their credit cards, increasing their savings, or paying essential bills. When I got my refund a few years ago, I broke that rule – but I felt vindicated regardless.
For one thing, since I always expect to owe the IRS money during tax season, I make it a point to keep extra money in my savings account for this express purpose. In fact, I actually have a dedicated savings account for those tax bills that is separate from my emergency fund.
But that year, I didn’t have to dip into that account. Rather, I had the opportunity to add to my savings. And so to me, my tax refund looked like found money – even though I knew it wasn’t.
But that’s not the only reason I felt comfortable taking that money and using it for a vacation. At this point in my life, I was in a solid financial position. I had no debt other than a mortgage, and I had a large cushion of cash in both my emergency fund and my special tax savings account. I was also on the right track with retirement savings, having consistently maximized my contributions.
In other words, I had no financial gap to fill. And so I made the decision to use that money to splurge.
Should you spend your tax refund or save it?
If you’re doing well on the savings front, don’t have unhealthy debt, and are in line with your financial goals, then go ahead and spend your tax refund on something fun. . But if your emergency fund needs a boost, you owe money on your credit cards, and you can’t remember the last time you put money in your IRA, you should probably use your refund to resolve one of these points.
This year I got the opposite of a tax refund – I ended up owing the IRS more money than usual. Luckily, I had enough money in that dedicated savings account to cover that bill. If that hadn’t been the case, I would have dipped into my vacation fund before dipping into my emergency savings to cover it. But I’m grateful it didn’t come to that.
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