Invest or Gift This Year’s Tax Refunds?

Income Tax

During tax season, filers try to maximize their deductions. Proper tax planning helps minimize tax due, and could result in a sizable refund. Taxpayers who receive refunds can spend them however they choose, but what strategy offers the most benefits?

Tax refunds might be spent frivolously or sensibly. Using the money toward a vacation could be a poor choice if the taxpayer would have benefited from paying down credit card debt. A tax refund could provide long-term returns through investments, tax breaks (depending on how the refund is spent), or additional tax advantages through strategic gifting.

Investing tax refunds. Individuals who have not reached their Individual Retirement Account (IRA) contribution limit ($5,500 annually; $6,500 if age 50 or older) could invest their refund in a traditional or Roth IRA unless they are 70½ or older, in which case regular contributions to a traditional IRA are no longer permitted. These individuals could still contribute to a Roth IRA subject to income limits. Aside from retirement savings, taxpayers could use refunds to purchase annuities, stocks, bonds, or other investments with the advisement of a Certified Financial Planner™.

Home improvements. Real property purchases are generally the largest, if not one of the largest, investments an individual will make during their lifetime. Property improvements help preserve or increase a home’s value. Federal and North Carolina tax credits can be claimed for a percentage of the cost of qualifying renewable energy improvements. Common qualifying technologies include geothermal heat pumps, solar-electric systems, and solar water heaters. A 35% North Carolina credit applies up to $8,400 for heat pumps, $10,500 for solar-electric systems, and $1,400 for solar water-heating systems. This credit expires at the end of the 2015 tax year, making it a prime time to take advantage of the tax break.

Gifts. Effective gifting strategies can help taxpayers enjoy charitable giving tax deductions. For non-charitable gifts, annual gifts (up to $14,000 for single filers, and up to $28,000 for married couples filing jointly) allow taxpayers to transfer wealth incrementally without a gift tax debt, while at the same time offering an opportunity to minimize their taxable estate.

According to the latest filing season statistics from the Internal Revenue Service, the average taxpayer’s refund is $3,224 ($3,309 for individuals receiving refunds via direct deposit). Whether you decide to invest, spend, or gift your refund, consult a tax attorney first.

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