According to the IRS, the average refund check paid out so far for the 2018 tax year has been $1,865, down 8.5% from $2,035 at the same point the year prior.
There’s now growing rage online from the middle class that they’ve been bamboozled by the Tax Cuts And Jobs Act.
But the reality is, Financial Samurai readers were prepared for the tax hike through the post, How To Prepare For Trump’s Middle Class Tax Hike, so things shouldn’t be too bad for us.
However, personal finance readers are only a small subset of the American population. Therefore, one should make a logical assumption that the closer we get to the April 15 tax filing deadline, the more outrage there will be.
I thought the tax hikes would only negatively affect those Americans earning $130,000 – $190,000 a year, which I consider middle class for those living in higher cost of living cities. But it sure seems like folks earning below $100,000 are also getting hit by thousands of dollars as well.
The upper middle class will most certainly also be hit once they fully experience the effects of the $10,000 SALT cap. Add these two classes together, and we are talking about the vast majority of Americans who will feel poorer.
When the C in the GDP equation: Y = C + I + G + NX gets hit, so goes the economy given C has the largest weighting.
Please pay close attention to tax news this year. Your investments and real estate purchasing decisions will depend on it. I fully expect expensive coastal city real estate markets to remain weak all year, in part due to the $10,000 SALT cap.
Utilize Your Tax Refund Wisely
Although $1,850 is not a tremendous amount, it’s still a decent chunk of change to be put to good use. $1,850 is equivalent to 3% of the median household income which is roughly $62,000 as of 2019.
Here are some recommendations on what to do with your tax refund.
* Make it disappear. In other words, put your tax refund into a savings account at another bank so that you cannot access it easily. Don’t go blowing your refund on anything unnecessary, unless you’ve already maxed out your 401K and saved more than 20% of your income.
You can now get a very health return on your savings account after the Federal Reserve raised rates multiple times since 2015. Check out CIT Bank online. Their savings rate is among the highest in the country.
* Pay off your credit card or car loan debt. Credit card debt is the most expensive type of debt you can pay. We’re talking 15% – 20% interest rates, which not even the great Warren Buffet can beat. It is stupid not to pay off your credit card at the end of each month and take advantage of a free 30 day grace period.
Furthermore, if you have a car payment that has an interest rate of much more than 5%, and whose value is more than 10% of your gross annual income, you are also wasting your money. Never take on debt to buy an asset that has a high chance of depreciating.
* Invest in yourself. This is my most favorite option because the returns on investing in your education, communication skills, language skills and so forth are multi-baggers! It always seems a little foolish to pay $1,000 for a presentation class until you confidently get on stage and wow your listeners to act. Learning another language is priceless if you are dealing with that particular region for business. I firmly don’t believe one can get enough education.
* Invest in your business. If you’ve got a small business, don’t be afraid to spend some CAPEX to provide a better experience for your customers. Obviously weigh the amount of money you will spend by your current revenue, balance sheet, margins, and payback period. I view a small business like one’s child. Nourish it and watch it grow.
* Build passive income. If you ever want to retire early, it’s important to build your after-tax investments so they can spit out passive income. You can’t touch your 401(k) or IRA without a 10% penalty until 59.5. I’ve put together a great article highlighting the best passive income investments to make.
Although nobody likes having a big tax bill, always try to look on the bright side. The higher your taxes, the happier you may become.
More On Starting A Business
A business is one of the best ways to shield your income from taxes through business deductions. You can either incorporate as an LLC, S-Corp, or simply be a Sole Proprietor (no incorporating necessary, just be a consultant and file a schedule C).
Every business person can start a Self-Employed 401k where you can contribute up to $57,000 ($19,000 from you and ~20% of operating profits).
All your business-related expenses are tax deductible as well. Simply launch your own website like this one in under 30 minutes to legitimize your business. Here’s my step-by-step guide to starting your own website.