University of Wisconsin - Extension

By the end of September, 96 million American taxpayers will have received a tax refund heck from the U.S. Treasury as the first part of the $1.35 trillion tax cut passed this summer by Congress.

¿More than 80 percent of the checks will be for the maximum amount--$300 for single filers, $500 for heads of households, and $600 for joint filers," says Linda Boelter, Certified Financial Planner and Family Financial Management Specialist for University of Wisconsin-Extension.

"The big question becomes what to do with your tax refund check," Boelter adds.

For many people, Boelter says the smart move is to use the one-time windfall to pay down debt--especially high interest credit card debt.

Paying off an 18 percent credit card debt is equivalent to earning a 25 percent return for a person in the 28 percent tax bracket. That's because you'd have to earn a 25 percent return to net an 18 percent return after taxes. And best yet, unlike investments in stocks or bonds, the amount you'll earn by repaying debt is guaranteed and tax-free.

If you don't have consumer debt, consider parking your refund check in a money market fund or CD to build an emergency fund.

"Most financial experts recommend having at least two to three months' worth of living expenses in an emergency fund," according to Boelter.

Another good use for your tax refund is to put it toward your retirement. If you haven't yet contributed to your IRA for 2001, use the refund toward the $2,000 annual contribution. Check the calculators linked to the web site http://www.rothira.com">www.rothira.com to determine whether a traditional or Roth IRA is best depending on your age, planned retirement date, and marginal tax bracket.

Starting next year, the maximum IRA contribution will increase to $3,000 for 2002-2004 and eventually rise to $5,000 in 2008 and after.

For more ideas on how to use your tax refund to pay down your debt or reach your savings goals, contact your http://www1.uwex.edu/ces/cty">county UW-Extension office and ask for information on "Money 2000 and Beyond."