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5 Surprisingly Smart Ways to Blow $1,000 of Your Tax Refund

Tax refundBy Cameron Huddleston, contributing editor, Kiplinger.com

I want to share a poem my 7-year-old daughter wrote last night:

I have had no money for a while
Then for my birthday someone gave me 1,000 dollars.
Let's go buy all we want!
Oh, now we have no more money.

Plenty of you have probably received -- or will soon -- checks for that amount from Uncle Sam. In fact, the average refund has been nearly three times that amount for the past two years. It's tempting to spend on something you really want -- say a big-screen TV, tech toys or new clothes -- but you'll be better off it you put that money to work for you.

Here are five good uses of your tax refund (or birthday check, or any other small windfall). And check out our 10 Smart Uses for Your Refund slide show for more ideas.

If you had $1,000, how would you spend it? Share your ideas in the reader comments box below. (And, in case you're wondering, I've never given my daughter $1,000 for her birthday.)

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Cities with the Lowest Tax Rates

The total amount of tax you pay reaches far beyond what you owe the federal government. Depending on where you live, most likely you're required to pay additional taxes, including property and sales tax. The disparity between the amount of tax you pay in a low-tax city and that in a high-tax city can be dramatic. Living in any of these 10 cities could save you a bundle, although the exact amount may fluctuate based on your income and lifestyle choices.

Cities with the Highest Tax Rates

Much ado is made in the press about federal tax brackets, but cities can carry a tax bite of their own. Even if you live in a state that has no income tax, your city may levy a variety of taxes that could eat away the entire benefit of living in an income tax-free state, including property taxes, sales taxes and auto taxes. Consider all the costs before you move to one of these cities, and understand that rates may change based on your family's income level.

Great Ways to Get Charitable Tax Deductions

Generally, when you give money to a charity, you can use the amount of that donation as a deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.

A Freelancer's Guide to Taxes

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.

Tax Deductions for Voluntary Interest Payments on Student Loans

Most taxpayers who pay interest on student loans can take a tax deduction for the expense ? and you can do this regardless of whether you itemize tax deductions on your return. The rules for claiming the deduction are the same whether the interest payments were required or voluntary.

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May 05 2012 at 11:49 PM Report abuse rate up rate down Reply

The smartest thing is not have a refund coming. That way you have use of your money all year long. Why have the government hold your money for over a year when it's just sitting there doing nothing.

April 01 2012 at 10:27 PM Report abuse rate up rate down Reply

One of the smartest things to do is get a Suze Orman "smack down" on your debt and finances and the best part is: it won't cost you a thing !!!

April 01 2012 at 9:14 PM Report abuse rate up rate down Reply

The smartest thing to do with the $1000 is to stash it in an "emergency fund". If you did that every year, you would soon have a pretty comfortable "nest egg". Either that, or adjust your withholding...if your return is that big you are actually just "shorting" you paycheck and giving the government an interest free loan.

March 26 2012 at 9:46 AM Report abuse rate up rate down Reply
1 reply to aeturnus's comment

Great advice, especially for those individuals that find it hard to save money.

April 01 2012 at 9:09 PM Report abuse rate up rate down Reply

HA! I wish I was getting ANY money back. I owe more and I was/am unemployed. Go figure...............

March 26 2012 at 8:00 AM Report abuse +1 rate up rate down Reply

I keep $500.00 to $700.00 in my desk drawer. When I need money quick I loan it to myself . When I get paid I pay the dawer back. I always hae money of the books and on hand when a bargan pops up unexpectedly. It is nice to have a little cushion ,but you can cheat yourself and not pay it back or you will end up with nothing again.

March 26 2012 at 5:48 AM Report abuse rate up rate down Reply

MIne gets thrown in the bank to help pay my yearly extortion bill, better known as school taxes.

March 25 2012 at 9:36 PM Report abuse +2 rate up rate down Reply
1 reply to Lisa's comment

Lisa----I'm with you although my city also takes a bundle for "Parks and Recreation" and to make million dollar bike lanes instead of improving the streets and filling the "pot holes" for the 99.8% that drive a car.

April 01 2012 at 9:12 PM Report abuse rate up rate down Reply


March 25 2012 at 7:21 PM Report abuse rate up rate down Reply

$1,000.00 is chump change in comparison to an amount that would be significant enough to warrant writing an article of interest. Oh yeah, don't forget this little surprise - That refund check from IRS is subject to income tax on your next filing, so about 25% or more of that big $1,000 is going to evaporate courtesy of your federal and state income tax load - so now how cool do you feel? Gee, what remains may be enough for 6 or 7 fairly nice dinners out with a bottle of wine. Or you could fill your SUV's fuel tank about 12 times. If your vehicle has a timing belt that needs to be replaced (60,000 miles for affected makes/models) you could do that. Or you could make the smart play and pay down your credit card debt and call the bank to ask them to lower your credit line to prevent getting trapped again (nah, that is way to smart a thing to do, eh?). So $1k is a fairly nice chunk of cash to play with, but until you get into a $10,000 windfall there really is not a lot to talk about that could be life changing unto itself. At that, even $10k can go pretty fast if restraint is not exercised, as there are plenty of folks that would love to help you spend it (new car with a nice down payment anybody?) In my case even $10,000 would not excite me unless it was truly unencumbered of income tax. Then we could talk about making an investment somewhere.

March 25 2012 at 11:50 AM Report abuse -1 rate up rate down Reply
1 reply to IraRadnick's comment

Paying down a credit card is good... but think twice about asking the bank to drop your credit limit. It can lower your credit rating as well. Instead just show restraint and dont get yourself in the credit card game again. Better to take all your credit card debt and with the help of a loan calculator put all your credit cards on an fasttrack repayment plan. Just a few dollars more than the minimum can and will take YEARS of the payback the credit card companies charge.

March 26 2012 at 10:28 AM Report abuse rate up rate down Reply

The smartest thing anyone could do with $1000 is to spend it getting a 15 minute investment consultation from me. It will change your life.

March 25 2012 at 1:27 AM Report abuse -3 rate up rate down Reply