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College of Human Ecology

K-State Financial Specialist: split tax refund to save, spend

Thursday, February 14, 2008

MANHATTAN, Kan. - This year, taxpayers due an income tax refund will be able to authorize dividing their refund into direct deposits for up to three financial accounts.

The IRS´ new form - numbered 8888 and commonly called a split refund form - makes saving simple, said Carol Young, Kansas State University Research and Extension financial management specialist.

The automatic savings tool should help consumers avoid impulse spending at tax time, she said. Dividing refund deposits between a checking, savings and investment or retirement account may, for example, allow taxpayers to catch up on bills, treat the family to a night out, build emergency savings and save for a long-term goal such as retirement.

Opting for direct deposits also typically makes the refunds available in two weeks, rather than the six or more weeks it can take to process a paper check, said Young, who encouraged taxpayers to take financial account numbers along when meeting with an income tax preparer.

The automatic savings tool is meant to encourage saving and investing, she said. For example, a taxpayer due a $2,000 refund could direct a $1,000 deposit to a personal savings account; $500 to a separate emergency fund savings account, and $500 to a checking account to pay off the last of the holiday bills that had been charged to a credit card.

Another taxpayer receiving the same amount could direct $1,000 to a child´s college savings account, $500 to personal savings and $500 to a mutual fund investment account.

A third taxpayer receiving the same amount (who has an emergency fund in place) could direct $1,000 to personal savings, $750 to an Individual Retirement Account (IRA) and $250 to a checking account to fund a weekend getaway for the family.

Paying down debt is recommended; so are building an emergency fund and personal savings, the financial management specialist said.

According to a recent survey reported by the Consumer Federation of America, Americans typically spent about $2,000 on unexpected expenses last year, Young said. Two- thirds of the expenditures were for medical or motor vehicle expenses.

An emergency fund can eliminate the need to borrow or run up a credit card bill, she said.

An income tax refund will seem like free money to many, but it is a signal that a taxpayer has had too much income tax withheld from his or her paycheck and is providing an interest-free loan to the government, Young said.

Taxpayers due a significant refund are advised to check with their employer´s human resources department to adjust withholding to better match typical tax liability.

Adjusting withholding will make more money available to the taxpayer during the year on paydays or, if directed toward an automatic savings deposit, help to build an emergency fund and personal savings, Young said.

In recent years, the average taxpayer´s refund has been around $2000, she said. For many low- to moderate-income households, such a refund will be the largest amount of cash a taxpayer will receive during the year.

Taking the time to think about how best to use a refund to improve a personal financial outlook before spending any of the refund is recommended, the financial management specialist said.

This year, many Extension offices in the state are promoting America Saves Week, Feb. 24-March 2 in conjunction with ongoing Kansas Saves activities. The weeklong public awareness campaign encourages saving and reducing credit card spending to build financial security.

K-State Research and Extension programs support the goals of the America Saves Campaign, which is a national initiative sponsored by the Consumer Federation of America and numerous national partners.

Information about the campaign, saving and spending can be found at www.americasavesweek.org.

More information on saving, spending and stretching a paycheck is available at county and district K-State Research and Extension offices and on Extension Web sites: www.oznet.ksu.edu and www.oznet.ksu.edu/financialmanagement or enroll as a Kansas Saver at www.kansassaves.org.

K-State Research and Extension is a short name for the Kansas State University Agricultural Experiment Station and Cooperative Extension Service, a program designed to generate and distribute useful knowledge for the well-being of Kansans. Supported by county, state, federal and private funds, the program has county Extension offices, experiment fields, area Extension offices and regional research centers statewide. Its headquarters is on the K-State campus in Manhattan.

Story by:
Nancy Peterson
K-State Research and Extension

For more information:
Carol Young is at 785-532-5773 or cyoung@ksu.edu.

This article was posted on Thursday, February 14, 2008, and is filed under College News.