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Time to File!
It’s the beginning of the year, which means you can file your taxes for the previous year. If you’re like me, you like to file as soon as you can so you can receive your tax refund (if you have one) as soon as possible. You’ll need to wait until you receive all of your tax documents (i.e. W-2’s, 1099’s, etc.), but once you’ve got them all, you’re ready to file!
Should I Use My Tax Refund to Pay Down Debt?
Yes. If you are following Dave Ramsey’s baby steps, and you are on Baby Step #2 (pay off all debt except your house), then you should apply your tax refund to your debt snowball. As a Dave Ramsey Financial Coach, I recommend paying off your debt using the debt snowball method. In a nutshell here’s how you would do your debt snowball:
- List consumer debts from smallest to largest balance owed
- Pay minimum payments on all except the smallest debt
- Attack the smallest debt with everything you can until it’s paid off
- Roll over the payment freed up from the smallest debt onto the next debt
- Attack that debt with everything you can until that’s paid off
- Repeat 4 and 5 until all of your consumer debt is paid
Using your tax refund is a great way to gain some momentum with paying off your debt. Being able to pay off a credit card or two will give you some much needed encouragement as you continue your debt payoff journey.
If you don’t have a debt snowball set up yet, sign up below to get a Debt Snowball printable worksheet. It’s simple to fill out and follow. Includes simple instructions too. Check it out!
What does Dave Ramsey say about tax refunds?
Dave Ramsey teaches and recommends that you shouldn’t have a tax refund. He says that it’s better for you to receive that money in your paycheck instead of lending it for free to the government and waiting to get the money back the following year.
Tax credits change things up a bit if you have children and other qualifying credits, but as much as you can, you should optimize your withholdings so that you don’t have a huge tax refund every year (that means more money in your paycheck instead). I am not a tax professional, and I share from my own personal experience and coaching (see my disclosure). You should consult with a tax professional for qualified advice and help.
Other Smart Ways to Use Your Tax Refund
- If you’re still on baby step #1, save $1000 in your initial emergency fund. You can definitely do this quickly!
- Fund your sinking funds (i.e. – car, home repairs, appliances, other big purchases)
- Fund your fully-funded emergency fund (baby step #3, three to six months worth of your monthly expenses)
Other FAQs about tax refunds:
When should I expect my 2020 tax refund?
According to the IRS.gov website, 90% of tax refunds can be expected to be received within 21 days. It may take longer if your return requires additional review.
How much of my tax refund should I save?
It depends on where you are on your baby steps. If you’re still on baby step #1, you should immediately set aside $1000. If you’re on baby step #2, in addition to paying down your debt, it’s a good idea to save some money as well. I like to save at least 10% either in my sinking funds or in my emergency fund (above the initial $1000).
How do I track my tax return?
Check the IRS website. You can check the website’s tool, “Where’s My Refund?.”
You’ll need your SSN or ITIN, fiing status, and exact amount of your refund.
Should I do my own taxes or hire a professional?
This depends on your situation. If you have various types of income sources and possible tax credit qualifications, it might be best for you to hire a tax professional to get your maximum tax benefit amount.
I have both done my own and hired a professional (mostly because I was away from home for several months). We have children and own a home, and in my experience, it was fine filing my own taxes. In the future when we have more and various types of taxable income, I do plan on hiring a professional.
The good thing about today is that the online tax programs are pretty good at guiding you through the process and asking you the right questions to get you the most money back. This quiz can help you figure out if it’s best for you to hire a tax professional or do your taxes on your own.
If I do my own taxes online, where do I file?
There are many different online tax services that you can use to file your taxes online. The three that I have used in the past and recommend are:
Each of the three services include a free filing option. They all try to help you get the maximum refund you qualify for. If you have the time and patience, you can go through the filing process on each website and see which one gives you the best amount.
During this time of year, you’re probably going to see a lot of ads telling you how you can spend your tax refund. You can get this shiny new thing, or that shiny new thing. Don’t fall for the temptation! Face forward, put your blinders on, even unsubscribe to some emails if you have to. Remind yourself that you are on your way to financial freedom. Your tax refund can give you a big leap forward in your journey if you’re smart with it. You got this!