Tyson's
Tax Tips:
Five Ways to Make the Most of Your Tax Break
Whether you're saving a small fortune or a mere pittance from the new tax bill, financial counselor Eric Tyson has some ideas on how to invest it productively.
The latest tax breaks are probably saving you at least a few dollars. Both single folks and married couples receive a break. Many people with dependent offspring get a $400 per child tax credit. And investors will enjoy dramatically lower federal tax rates on corporate stock dividends. But before you go out and blow your "windfall" on a new TV or gamble it away in Vegas, financial counselor Eric Tyson-author of the newly revised book Personal Finance For Dummies®, 4th Edition (Wiley; 2003, ISBN: 0-7645-2590-5, $21.99) suggests you put it to work for you:
- $ Pay off consumer debt. If you owe money to a credit card company or on an auto loan, this is the perfect opportunity to make a dent in those debts. Tyson defines bad debt as debt incurred for consumption-debt that usually carries a high-interest rate and is not tax-deductible. "High-interest consumer debt on credit cards and auto loans is like cancer," he says. "Its growth can snowball and get out of control."
- $ Do home repairs. Real estate can be a great investment, and that's why owning a home can be a smart financial move. Many people tend to procrastinate on home maintenance tasks, especially when money is tight. Unfortunately, when you put off fixing small problems, they eventually turn into big, costly problems. Maybe your tax break isn't enough to finish the basement-but it might be enough to resurface the driveway, say, or do some repairs.
- $ Fatten your retirement account. It's not always easy to save money for retirement, particularly if you don't have an employer-sponsored 401(k). Why not add your tax savings to your IRA-or, if you don't have one, start one? You will get an up-front tax break. Contribution limits for all types of retirement accounts are rising.
- $ Invest in the stock market and other investments that produce long-term capital gains. "The market has had a nice bounceback during the past few months," Tyson says. "Still, from a historic perspective, stocks are a much better value than they were a few years back. Just don't speculate on high-flying stocks. Instead, pick solid, conservative mutual funds. Emulate the tortoise, not the hare. In addition to stocks, investing in real estate and small business can build wealth and allow you to take advantage of the new lower tax rates on long-term capital gains."
- $ If you must spend it, spend wisely. If you have worked overtime all year without a break, frankly you're due a bit of recreation. As Tyson frequently reminds his clients, a life devoted to accumulating money is hardly worth living. Balance is key. So if you're getting a tax break of say, $600, just be sure to spend it on something life-affirming: family, friends or good clean fun. Ask yourself: Do I really need that big screen TV? Instead, recharge your batteries with a beach weekend or buy that digital camcorder so you can record your child's birthday parties or buy a gym membership so you can stay in good health and actually enjoy your long-awaited retirement! Alternately, if you are fortunate enough to have everything you want and need, consider donating it to a good cause-a thoughtful investment in society is never wasted.
Editor's Note: Eric Tyson, MBA, is an accomplished financial counselor and freelance personal finance writer. He is the author of numerous other For Dummies national bestsellers on personal finance, taxes, investing, and home buying, and is a syndicated columnist. His work has been critically acclaimed in hundreds of publications and programs, including Newsweek, The Los Angeles Times, The Chicago Tribune, Kiplinger's Personal Finance Magazine, The Wall Street Journal, Bottom Line Personal, as well as NBC's Today Show, CNBC, PBS's Nightly Business Report, CNN, FOX-TV, CBS national radio, Bloomberg Business Radio, and Business Radio Network. His radio commentaries can be heard on the nationally syndicated public radio Sound Money program. Eric is a former management consultant and holds an M.B.A. from the Stanford Graduate School of Business.
