The holidays have come and gone, and the next ‘holiday’ season has officially begun – tax season. Before you get stressed out and keep scrolling, let’s talk about what a tax return is and a few different ways you can consider using yours.
Hey MoneyLion, my name’s Austin Hankwitz, and I talk about personal finance and investing online. I grew up in a small town in northeast Tennessee, and probably like you, I definitely did not learn enough about taxes in high school or college. But that’s alright – there’s no better time than the present to find out more information.
First, what’s a tax return? Well, it’s a piece of paper or electronic file that reports your income, deductions, tax credits, and more to the Internal Revenue Service (“IRS” shown on the screen with frightened face emoji). That’s it.
When I say “income,” you may be thinking of your wages stated on your W-2 that you receive from your employer. However, you may also receive other sources of income, such as money you made driving Uber or some other side hustle. You might also have investment income, so keep an eye out for the infamous “tax forms available” notification from your broker.
To maximize your tax return, you can consider claiming deductions. Deductions are specific expenses you’ve made this year that you can take off from your income and can lower your tax bill. There are different kinds of deductions, so be sure to look into the best options for your situation.
Another way you can try to maximize your tax return is by taking advantage of tax credits you’re eligible for. Tax credits can lower your overall tax liability, with the Advance Child Tax Credit Payments in 2021 being a recent example. There are tons of other examples, so you may want to look further into them.
Alright, we got the boring stuff out of the way. If you want more information, feel free to go to MoneyLion.com/taxes to view some helpful articles.
Now you know about tax returns and where to find more information about them. But what can you do if you receive a tax refund this year? Everyone’s situation is different so consider using the money wisely for your situation. Let’s rapid fire-off a few options:
If you have debt, consider paying off high-interest debt like credit cards. If that’s taken care of, you can put your refund towards your emergency or “rainy day” fund. The amount you save for these purposes depends on your personal circumstances, but a generally accepted principle is to save 3 to 6 months of expenses.
If your savings account is established, you can also consider investing that money toward the future.
We’d all like to build our wealth and reach our retirement goals. One way people do this is by investing in the stock market, which has returned roughly 10% per year on average for nearly the last century (Source: Nerd Wallet). With that in mind, you can invest your tax return money in well-diversified funds.
So there we have it! If you’re lucky enough to get a tax refund this season, there are a lot of things that you can consider doing with it, including paying off debt, saving for a rainy day, or investing the money that you may not have even planned to have in the first place.
A brief heads up — this is a sponsored video. MoneyLion and I have partnered to make important financial lessons easier to understand. My name’s Austin Hankwitz, and we’ll see you on the next Beyond the Wallet.
Written disclosure: This video is sponsored by MoneyLion. All content is for informational purposes only.
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes.