Tax Refund on the Way?

LifeZette has teamed up with the pros at Dave Ramsey to help answer some of your most pressing money questions — which this month includes tax refunds and what to do with the “extra money” that may be coming your way.

Should you save it or spend it? Should you panic if you find an audit is coming your way?

LifeZette spoke with Chris Hogan about 2016 tax refunds. Hogan is the #1 national best-selling author of “Retire Inspired” and a financial expert with the Dave Ramsey group. He also runs ChrisHogan360.com.

Question: How do most people think about their tax return money?

Answer: Most people look at this money as a bonus. They think of it as free money that somehow made its way into their checking account. If you have this type of “bonus” mentality, you tend not to respect the money. Instead, you need to think about it like this: You earned this money. You left your family each morning and went to your job and worked really hard to earn it — this money has found its way back to you.

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Question: Does it matter how much you are getting back in your tax refund in determining what to do with it?

Answer: No matter how much money you are getting back from the IRS, it all needs to be treated the same. We need to be intentional with our refund. There are four things we need to do:

1.) Save it. If you don’t have an emergency fund, start there. Work towards saving up $1,000 in a money market account, and then work up to having three to six months’ worth of an emergency fund saved, to cover expenses. The “what ifs” are tackled — what if I need a new car battery, or new tires? Those are now handled.

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2.) Pay off debt. Wipe out some debt with that refund. Credit card loans, car loan, student loans — start with the smallest debt first. This way you’re gaining momentum and feeling like you’re making progress. We are motivated and focused when we make progress. You’re also giving yourself a raise when you pay off debt. Remember that. We don’t have to work harder, but we do have to work smarter.

3.) Save for your retirement future. Invest that money for retirement, because there’s no better time than the present. Once you’re debt-free and have an emergency fund, 15 percent of your household income should go toward the future. Reach out and talk to an investment professional, one who has the heart of a teacher. This is somebody who is not just trying to sell you some stuff, but is trying to help you get to your destination.

4.) Have some fun. Once you’ve added to your emergency fund, paid off some debt, and invested in your retirement, it’s time to have some fun. Set a dollar amount of money you will play with, so that again, you are intentional with it. Have no regrets three months later.

Married people should sit down and get agreement on how money is spent. If you’re single or newly single, grab an “accountability partner,” a friend you can work with. You can both be accountable to each other.

[lz_infobox]According to the Internal Revenue Service, almost 40 million tax refunds worth nearly $125 billion have been issued as of Feb. 20. The average refund is $3,120.[/lz_infobox]

Question: What if you find out you owe money to the IRS?

Answer: Take a collective deep breath and start to work a game plan. Contact the IRS and have an open discussion. They can double check on that amount owed, and then discuss the repayment process with you.

There are two departments for this inside the IRS: One is the streamlined department. They look at how much you owe; they have already calculated that. The second is the non-streamlined department, and I want people to know about this. You may have to be on hold for 20 minutes to get to the people in this department, but they are willing to work with you, and set up a payment plan that works for you and for your budget.

Question: What if you find out there’s an audit in your future?

Answer: Reach out to a tax professional or even a tax attorney, and gain an understanding of the process and what’s going to occur. If you’re self-employed, the process is going to look a lot different than if you work for a company. Random audit selections also happen, or there could have been some red flags that caused your audit. Typically, a self-employed person should have been paying quarterly taxes, and perhaps that person didn’t, which caused the audit.

Regardless, have an open and honest consultation with a professional to see what it’s going to look like, and prepare yourself. And take a deep breath. It can all be worked out.

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