How to Spend Your Tax Rebate

• by Tracy C.

Introduction

• In the first tax rebate the United States has seen since 2001, in 2008 more than 130 million qualifying Americans are receiving up to $600 for indivduals, or $1200 per couple, plus $300 for each child as part of an attempt to revive a faltering economy. Many eligible Americans will receive their rebate checks in May 2008, prompting retailers and small business owners alike scramble to attract consumers whose rebate checks are burning holes in their pockets.

• While most people have said they'd spend their rebates paying off debt or using the extra cash for necessities like gas and groceries, others are following experts' advice to invest in a retirement plan, or open a fund for a child's education. Got the future covered? If you feel comfortable enough with your financial situation to justify a government-funded splurge, don't worry, there are plenty of "stimulating" options to consider.

Step 1: Assess Your Financial Picture

• Before eyeing that new iPod or envisioning a romantic beach vacation, you should calculate exactly how much you'll be getting and evaluate your entire financial situation.

Calculate Your Rebate

• Your rebate will depend on your adjusted gross income of 2007 and whether or not you filed as an individual or a household.

1. Calculate your 2008 rebate to determine exactly what you'll receive.
2. If you still have questions about your filing status or what rebate to expect, see David McPherson's answers to additional tax rebate questions.

Take a Hard Look at Your Financial Health

• As tempting as it may seem to use this bonus check to buy that longed for item, if you are deeply in debt or unprepared for the future—or any expensive surprises that may come your way—it's best to reconsider how you'll use your rebate.

1. If you are in debt, unemployed, or unprepared for retirement, it's important not to view your rebate as "found money," but rather an opportunity to save for the future.
2. With rising prices for food, gas and basic necessities, even if you feel comfortable spending your rebate, you might want to save at least some for later on.
3. Before doing anything else, be honest with yourself about your debt and how much you owe. If you are paying high interest payments each month on credit cards or private student loans, using your rebate windfall to lower payments makes a lot of sense.
4. Critics of Bush's $168 billion stimulus package argue that the government has never "incentivized saving", which is perhaps a part of the economy's problem. Just because the federal government is encouraging you to spend instead of save, you shouldn't feel guilty about keeping your rebate in the bank.
5. Or, look at it this way, like Bankrate's financial expert Barbara Mlotek Whelehan:
   • • "[If you've saved enough] go ahead and splurge! You deserve it, and so does the economy. But if you need the money for something, go ahead and use it wisely. You deserve it, and the economy will understand."
6. If you do choose to spend your rebate, that's okay, just choose something to spend it on you'll be happy about later, like donating to charity, or taking a family vacation.

Step 2: Consider Not Spending Your Rebate

• Only 21% of Americans surveyed say they'll actually spend their rebates. What are the rest doing? Reducing debt and saving for the future.

Pay Down Debt

• 47% of Americans surveyed will use their rebate checks to pay down debt.

1. If you have "high-interest, non-deductible debt like credit card debt," it's best to use your rebate to make a dent in it, which will in turn lower your monthly payment as well as the overall amount you'll pay creditors.
   

   (Photo by Steve Woods)
2. Consider switching to a lower rate credit card and using your rebate to pay down the debt. See Mahalo's guide to How to Get a Low Interest Rate Credit Card to learn how.
3. Recent graduates struggling under massive student loan debt, particularly if it was issued by private lenders using variable rates, might use their rebates to make an extra loan payment towards principal.
4. If you have an adjustable mortgage whose rate is about to jump, you might use your rebate to offset increased monthly payments.
   • Don't pay down your mortgage if you're carrying non-deductible debt like credit cards or private loan interest.
5. If all other debt is under control, then it might be time to make an extra mortgage payment, reducing the duration of your mortgage overall and saving you interest.
6. If you are concerned that paying down debt isn't stimulating the economy, think again. Paying down debt will arguably free up more consumer cash later to revitalize the marketplace.

Invest in Your Retirement

• You've probably heard it before, but the sooner you start saving for retirement, the faster your money will grow, furnishing you with a much bigger cushion down the line.

1. Consider using your rebate check to contribute to an existing 401(k) or 403(b) plan, especially if you're part of a matching program through your employer.
   

   Use the rebate to start saving for college. (Creative Commons photo by Peter Dutton)
2. If you haven't started saving for retirement, think about opening a Roth IRA, in which your money grows tax-free. Contribute to it regularly to avoid working until the day you die!
3. In 2008, you can contribute up to $6,000 to a Roth IRA, which includes a $1,000 "catch-up" allowance for individuals aged 50 or older.
4. You might also choose to open a health savings account to cover medical expenses that may increase in retirement or not be covered by insurance. Plus, a health savings account means that contributions are tax-deductible, and withdrawals are tax-free for most medical expenses.
5. See this Wall Street Journal article for more information on opening a health savings account (HSA).

Save for a Child or Grandchild's Future

• If you feel confident about your retirement fund, consider starting an account that will help your children or grandchildren pay for school, or retire someday themselves.

1. Try starting a 529 college savings plan for a child or grandchild that you can continue to contribute to, tax-free, over time.
2. Think about saving for tuition even if your kids are still quite young, like the Karas family did—putting $1200 in college savings funds for the future education of their kids, aged 1 to 11.

Save or Invest for Surprise Expenses

• Just because you may feel comfortable when your check comes in the mail, you never know what might happen at work or with your health. It's a smart idea to put aside your rebate for an unexpected expense.

1. Use your rebate check to open a savings account for emergency funds.
   • Try opening a high-yielding savings account to earn a little return on your money.
2. If you keep contributing to your emergency account each month in reasonable increments (say $50 a month), you'll have a financial cushion should you need one.
3. Or, you might try pre-paying regular bills like your heat and electricity, or your cell phone, so that if you lose your job, or suffer another financial blow, you will be sure to have the basic necessities for a period of time.

Step 3: Practical Ways to Spend Your Rebate

• If your debt is under control, and you want to spend some or all of your rebate, there are ways to do it that can help stimulate your bank account in the not-so-distant future.

Necessary Maintenance

• Car: Keeping up to date on regular car maintenance can save you thousands over time.

1. Check out maintenance tips for your vehicle at Edmunds.com.
2. You can use your refund for scheduled service, or also consider these helpful car maintenance ideas.

• Home: Most homeowners have a wish list of improvements. Why not work on that?

1. Buying energy efficient appliances for your home will not only help the environment, but it can save you hundreds each year on your energy bill.
   

   Use the rebate to buy new bulbs! (Creative Commons photo by Sue Richards)
2. Also think about starting projects like fixing your roof or cleaning the gutters that you might not have factored into the budget.
3. Painting a room can be a terrific update, too.
4. Maybe you need furniture for a new baby.
5. Or perhaps you should invest in a new grill for summer barbecues (which may reduce your expenses for dining out).

• Garden: Investing in landscaping can improve your home's value.

1. Try using your rebate to plant trees, a new lawn, or a vegetable garden.
2. You could also pay for any needed maintenance of your lawn or garden.

Stocking Up

• With gas prices causing significant constraints on spending and a reported 82% increase in gas prices (adjusted for inflation) in the past several years, many Americans feel like they might as well "sign the check over to Exxon Mobil."

1. Many consumers plan to put their refunds right into the gas tank, "fueling" the oil economy instead of retail markets.
2. Others say they'll use their rebates for everyday expenses like groceries, or simply to help confront sharply rising prices on necessary goods.
3. Even if people aren't spending right away on these necessities, they are putting rebates in savings accounts to help budget for food and other items.

Investing in Yourself

• You may also consider going back to school or making sure you're as healthy as can be.

1. Think about taking a class or getting help from a resume professional, both of which could lead to a career (and income) boost.
2. Or try taking a personal finance course to learn even more about how you can save and invest.
3. You might also want to consider seeing your doctor for a check-up.
4. If you've been putting it off because it seemed too expensive or wasn't covered by your insurance, make an appointment at the dentist or eye doctor. Learning preventative care now could save you thousands on pricey dental care, often not covered by insurance, later down the road.
5. Or, use it to pay existing healthcare costs, many of which have risen sharply over the years.

Step 4: Go Ahead and Blow It

• If you've gotten this far and feel strongly that your debt is under control, your retirement is more or less covered, and that check is burning a hole in your pocket, think about how you'd like to spend that gift from Uncle Sam.

1. Take a vacation with a friend or family member, even if it's just a short getaway.
2. If you have your eye on something available at a big chain store like Kmart or Sears, you might take advantage of their offer to trade you a gift card—with an additional 10% added on—in exchange for your rebate check. Using a similar tactic, Restoration Hardware offers $100 back when you spend more than $750 in their stores.
   

   Get that new laptop you've had your eye on. (Photo by Patricia Dekker)
3. Home Depot is pushing "green purchases," like energy-efficient lightbulbs which will save you money in the long run. And look for "rebate sales" all over in order to save on a purchase you were planning to buy anyway.
4. Get a hi-tech goodie, like one of the following:
   • • Update your personal computer: buy a new motherboard or upgrade your memory
     • Get an iPhone
     • Don't forget the ever-popular Xbox 360, or a new Wii
     • A new camera is another idea, and don't forget what Sony is suggesting this rebate season: a brand new flat-screen TV (just don't forget to read our guide, How to Pick a Flat Screen TV)
5. Then, if you want to get over the top with what will likely be a $600 rebate, try one of these "entertaining ways" to blow your rebate from the Los Angeles Times:
   • • A haircut with Sally Hershberger, who was the first celebrity stylist to charge $600 for a cut
     • A guitar signed by Aerosmith guitarist Steven Tyler
     • An annual pass to Disney World
6. Splurge on someone other than yourself. You can donate your rebate to charity. An organization like Kiva, which finances microloans to deserving entrepreneurs in poor countries, would appreciate any portion of your rebate you'd care to share.
7. Some consider the very act of giving your tax rebate away to be a direct affront to the Bush administration, particularly if your gift is going to an Iraq War veteran.

Conclusion

• Honestly, how much help do you truly need to find ways to part with several hundred greenbacks? Save your money for a rainy day or stimulate away with a unique splurge only you can think up. Whatever path you choose, our economy will thank you for it.

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Resources for How To Spend Your Tax Rebate

• ABC News: More Answers to Your Questions about Tax Rebates (January 27, 2008)
• Bankrate.com: 6 Step Debt-Elimination Program (February 25, 2008)  
• Bankrate.com: Spend, Invest, or Pay Off Bills?  
• Boston Globe: Stores Await Consumers' Tax Rebates (April 18, 2008)
• Business Week: The Scramble for Your Tax Rebate (April 23, 2008)
• CNN: Money 101 Lesson 9: Controlling Debt
• ConsumerReports.org: Put Your Tax Rebate to Work for You (April 23, 2008)
• Fox News: Twelve Hi-Tech Ways to Spend That Tax Rebate (April 16, 2008)
• Huffington Post: Want to Shame the Bush White House? Give Away Your Tax Rebate (January 30, 2008)
• Lifehacker: Calculate Your 2008 Tax Rebate (February 15, 2008)
• Los Angeles Times: 10 Entertaining Ways to Spend Your $600 Tax Rebate (April 15, 2008)
• Los Angeles Times: Retailers Aim for Share of Rebate Checks (April 14, 2008)
• MarketWatch: Tax Rebates Really Will Boost Economy, for a While (February 13, 2008)
• MSNBC: Money Worries May Hinder Tax Rebate Spending (April 4, 2008)
• MSNBC: You Could Get Your Tax Rebate by May (January 24, 2008)
• MSNBC: 10 Tips: Fund Your Own "Economic Stimulus" (January 24, 2008)
• MSNBC: Tax Rebate Splurges? Bills, Gas, Groceries (April 3, 2008)
• New America Foundation: Don't Spend Your Tax Rebate! (April 15, 2008)
• San Francisco Chronicle: Consumers Not Likely to Spend Tax Rebates (February 5, 2008)
• The Salt Lake Tribune: Rebate check: Spend it, or save it? Or a little bit of both? (April 19, 2008)
• The Street: Get Customers to Spend Their Tax Rebates with You (April 21, 2008)
• The Wall Street Journal: A Healthy Aid to Retirement (January 5, 2008)
• The Wall Street Journal: The Splurge Urge (April 24, 2008)
• USA Today: What Are You Going to Do with Your Tax Rebate? (April 14, 2008)

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