Black Belt Shopper
(featured column)

Planning for Your Tax Credits (or Refunds)
by Larry Wiener

The check is in the mail–that is if you qualify for the increase in the child tax credit. Your paycheck may be slightly larger. And if you regularly have capital gains and/or dividends, you may have some found money when you do your income tax return next year.

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Those are the major features of the tax cut that Congress recently passed and the President signed. If you are one of the fortunate ones to be gaining a significant gain from this legislation, now is the time to start planning to use it well.

When I first introduce friends to the principles of black belt shopping, one of the first questions I ask them is what they are going to do with the money they save. If you can save, say, $100 a month by using coupons, that $100 will do you more good if you are intentional about using that money to improve your life.

The same goes for whatever you gain from the new tax law. Here’s extra money you get without even having to clip a coupon, wait for a sale, or any of the rest. How are you going to get the most out of that money? Here are some tips...

Know What You Are Getting

There has been no shortage of articles online and elsewhere about who gets what from the legislation. If you missed the newspaper and magazine articles when the legislation was first passed, here is an online article that may help you:

turbotax.com/articles/Understanding2003TaxLaw 

or visit IRS.Gov

Figure out what you’ll get and when and how you’ll get it.

Be Intentional About Using the Money

Especially if you are getting a check in the mail, you’ll want to have a plan for what to do with your money. Building (or repairing) your financial base might be good use for some of that money. Here are some options to consider.

Pay down consumer debt  Anyone who reads this site regularly knows that we believe that debt is the enemy of financial freedom and that consumer debt is the most insidious debt of all. If you are getting a check for child credit, making a large payment on one of those credit cards may be good use of that money. While you are looking at your credit card debt, consider looking for a lower rate. That rate may be more available if you use some of that child credit money to pay down the debt.

Fund a reserve  If you’re in a place where a $200 car repair will put you back in debtors’ prison, consider using your child credit or other money to fund a reserve. A burst water heater or one of those other normal breakdowns doesn’t need to set you back if you have a reserve.

Review your withholding  If you are getting a large refund, think again. If you have use of that money every month or if you can save it with interest, you are better off than giving an interest-free loan to the government.

Review your retirement savings  If you are paying less in taxes, you may want to think about putting more into your 401(k), 403(b), or IRA. Many plans are tax advantaged. Talk to your HR department or advisor about this if you need to.

Consider extra mortgage payments If you are getting a noticeably higher net pay as a result of the tax, have a reserve, and don’t have high-interest consumer debt, you may want to make extra principal payments on your mortgage, either regularly or occasionally. Check with your mortgage company to make sure you are not penalized for this payment. Also, check to see if you have to write a separate check for the principal.

Make a purchase with long-term value  Maybe some new camping equipment will help your family enjoy life more. Maybe it’s time to replace that aging computer. Whatever purchases you make, consider ones that will have long-term value for you and your family. Restaurant meals are quickly forgotten. And, of course, if you do make a purchase with some of your tax savings, use the principles of black belt shopping to get the most for your money.

Consider the Effect of State and Local Taxes

Just as I was getting excited about saving money from the lower tax on dividends and work, I heard talk that the state legislature here in California was considering raising the car tax and the sales tax. This is going on in many localities as the downturn in the economy has affected state and local coffers.

Check to see what tax changes, if any, your state is considering and how those changes affect you.

The 2003 tax cut may or may not be a boon to the nation’s economy–experts differ on that question. What I know for sure, however, is that the tax act can be a boon to your personal economy if you really think through how that newfound can best benefit you and your family.

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Copyright © 2003 by Larry Wiener

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