By Lindsay Wong, 2018 Get It Back Campaign Intern
Ever wonder what you could do with the tax refund you get from claiming tax credits? The Earned Income Tax Credit (EITC) is a powerful tax benefit that can provide help beyond daily expenses to establish long-term wealth. Here are some ways you can use your EITC refund for asset development.
1. Debt Management
Use your tax refund to catch-up on past-due payments, stay current, or pay a month in advance to alleviate financial stress. Usually, paying off high interest debt (from credit card bills, student loans, or other loans) will take priority over making any new investments.
You have several options for using your EITC as a savings tool.
One option is to establish an emergency fund. Start with any amount of money you can afford to set aside, and build towards having a three- to six-month cushion in case unexpected costs arise. Use NerdWallet’s calculator to help you establish your savings goal.
You can also contribute to a retirement savings account. If your employer doesn’t offer a retirement savings account, consider a Roth Individual Retirement Account (IRA), which accumulates interest and allows for tax-free withdrawals in case of an emergency.
Interest rates are currently low, so placing your money in a bank account, while stable, will mean that your money value will decrease given yearly inflation. If you don’t need to touch the money for at least a year, consider putting it in a certificate of deposit (CD) or money market account. If you need more flexibility than what CDs offer, consider money market accounts which have varied interest rates and allow limited withdrawals.
3. Car and Home Ownership and Maintenance
Your tax refund is a prime opportunity to cover larger costs that come up, including those associated with your car and home. You can use your refund to purchase a used car, pay down your car loan, get your vehicle serviced, or use your EITC refund to help pay your car insurance for the year. If you don’t have a car, save some of your refund for bus or train fare.
If you are saving to purchase a home, use your EITC for the down payment. It can also be used for home improvement, such as fixing the sink or buying a dishwasher.
Use the EITC to pay tuition and school-related expenses for you or your children to increase education, employability, and earnings.
Do you have a business idea? Invest the EITC into your idea or use it to help finance property you may need to open a new business.