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Using your tax refund wisely
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April 14, 1999: 10:22 a.m. ET
Your tax refund could help reduce credit card debt or build your nest egg
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NEW YORK (CNNfn) - Not sure what to do with your tax refund this year?
Instead of blowing it on new kitchen cabinets or airfare to the islands, financial experts say you might want to consider a few more practical investment options.
Cindy Frailing, a spokeswoman for the National Association of Tax Practioners, said you could let the money ride in a Certificate of Deposit or a Roth IRA, an individual retirement account that grows tax-free.
CDs these days will earn you about 5 percent to 6 percent in interest.
You could also apply the refund to any number of college savings funds for your kids, allowing the money to mature over time - contributions to college funds are often tax deductible.
Make it a habit to sock your refund away for future tuition costs and it could add up over the course of a few years.
Another smart way to spend your money, experts say, is to apply it to your credit card bills. Your refund could reduce or eliminate your debt, which might otherwise spiral out of control as interest payments and late fees accrue.
Lance Wallach, a certified investment management consultant and frequent keynote speaker at accounting conventions, advises his clients this year to put their refunds into fixed annuities. Fixed annuities earn about the same as a CD. The difference is that they grow tax free.
(They aren't federally insured like CDs either, but Wallach said this is not generally an issue since fixed annuities are usually issued by deep pocket insurance companies.)
In prior years, Wallach said he suggested a more aggressive investment approach. But this year, he said, the Year 2000 computer bug has him concerned.
"I'm getting a bit concerned about Y2K and I think it's going to have a tremendous effect on the stock market," he said, noting that's just his opinion. "I'm telling people this year to maybe be a little more cautious until we see what happens."
Refunds on the rise
According to the Internal Revenue Service, roughly 69 percent of those who file tax returns receive refunds. As of April 12, the IRS had received some 76.6 million returns, about 1 percent more than it did for the same period last year. So far, there are 60 million refunds due, up about 4.8 percent from last year.
"The processing [of the returns] hasn't changed that much, but you are seeing an increase in the number of taxpayers who are getting refunds," said IRS spokesman Don Roberts.
He added the expected increase in refunds this year is primarily due to the new tax credits that took effect in 1998. Despite the agency's urging, many taxpayers last year took too few exemptions.
"People hadn't taken into account the child tax or education credits when planning their withholdings," Roberts said.
He said taxpayers who get a bigger-than-expected refund this year, and expect to use the same tax credits in 1999, should adjust their paycheck withholdings accordingly for next year.
That's especially true if you are taking advantage of the Child Tax Credit which jumps to $500 per qualifying child this year, from $400 in 1998.
According to the latest IRS data, nearly 23 percent of the 1998 returns it sampled claimed the Child Tax Credit. That's more than one in five returns.
"Now that people have some experience with these credits, they may want to adjust their withholdings for 1999," he said.
Refunds on the rise
So far this year, the average refund amount is about $1,575 - up 15 percent from 1998.
"Obviously taxpayers have a vested interest in putting more of that money in their back packet [throughout the year] instead of keeping it in a no-interest paying account at the United States Treasury," Roberts said.
Frailing agreed. If you receive a sizable refund this year, she said, you're doing something wrong.
"If you get a huge refund back, it's better to adjust your W-4 withholdings for the years going forward," she said. "A lot of people use their refund as a sort of forced savings account and that's not good because the IRS then has use of your money for the whole year."
Wallach added this is a good time to review your finances and avoid making the same mistake next year.
"Basically, this is the time for people to sit down and map out their financial plan," he said "It's the perfect time. You get back your money and see where you are and maybe plan on not giving the government a free loan next year." 
--by staff writer Shelly K. Schwartz
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