Turning your tax return into a year-round help, not just a one-off

When in doubt, allocate your tax refund to your emergency savings account

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After filing our taxes, we anxiously look forward to getting some of our hard-earned dollars back. Many people have plans for that money long before the refund is received. For some, it can be a welcome relief from a tight budget. For others, it can mean paying down debts or the opportunity to splurge on a luxury item. But perhaps there is a better way to use that money, to help you get more of what you want or need year-round.

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Before deciding where that money can have the biggest impact, it’s important to first assess your budget. If you find you’re constantly running a deficit, using your tax return to eliminate a monthly expense or debt could free up cash flow. For example, if you can pre-pay your car insurance or property taxes for the year, that will free up money that would normally have gone to that monthly bill. This money can mean affording some new clothes or visiting the dentist or optometrist. Doing some much needed self-care can be an excellent way to use those funds.    

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Sometimes our budget shortfalls cannot be rectified by a once-a-year influx of cash. There may be specific expenditures in your budget that are causing a deficit. Using your annual tax return to “get caught up” won’t solve the problem; it just delays the consequences. To build a working budget, track where your money is going. If your expenses exceed your income, then cutting back to balance your budget is worth considering. If reducing your expenses is not an option, it may be necessary to increase your income to ensure you’re covering all your expenses and obligations.    

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Often, high debt payments can result in ongoing budget deficits. If this is the case for you, it could be beneficial to use your tax refund to reduce some of that debt load. However, if your tax refund is not sufficient to pay off enough debt to have the desired impact on your budget, it might be time to seek professional help.

One option is to apply for a consolidation loan with your bank or credit union to lower your monthly payments and interest. You can also learn more about tackling your debts by talking to a credit counsellor for free at a not-for-profit credit counselling agency. They can also help you improve your budgeting and money management skills to achieve a balanced budget, which is super important if you consolidate your debts with a loan.    

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If you find you are using your tax refund to pay off Christmas bills, consider adding savings to a holiday budget into your budget year-round instead of always playing catch-up. Just as with home repairs, it’s much less expensive to use your own saved funds rather than paying 20-plus per cent on a credit card.  

Many people’s goal is to ensure they get money back on their taxes. They are, in essence, using it like forced savings and it’s a great way to keep that money safe from yourself. However, Canada Revenue Agency (CRA) does not pay you any interest on the money they hold for you. If you find you consistently get large tax refunds and your budget runs short each month, one of the ways to increase your income is to reduce the amount of tax withheld throughout the year.

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This is possible if you have any tax credits included on the TD1 form you submit to the payroll department at work. Instead of benefiting from your credits once a year, you can benefit each month when a little less is taken off each of your paycheques. As nice as it is to receive that big lump sum every spring, the stress relief from having a bit of breathing room every month will be even better.  

You can also use your income tax refund to cover expected, but somewhat optional annual expenses such as your summer vacation or desired home improvements. Every year since we’ve been debt free, my husband and I have used our refund money to invest in our home. There is always something we want to do. If we can’t think of anything right away, we put the money in our “home maintenance” savings account until we are ready to use it. We prefer to use our own money, rather than borrow and pay interest to the bank for our home improvements.  

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When in doubt, allocate your tax refund to your emergency savings account. Whether you have debt or not, having an emergency fund is key to not being forced to use credit when an emergency arises. If living through two years of the pandemic has taught us anything, it’s how important it is to be prepared for the unexpected. Having savings will help you weather most things that life can throw at you, including a record-setting dump of snow in April. 

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 25 years.


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