The extended July 15 filing deadline this year can be either a source of dread if you owe Uncle Sam some money or joy as that anticipated return hits your mailbox. Since the average tax return, according to the IRS, is somewhere around $3,000, not including any additional money you may have received in the form of COVID-19 relief. This may represent a significant chunk of change that could go towards buying a new vehicle. However, you should look at this source of cash as a concern, because while it can represent found money towards that new car purchase, there are also potential pitfalls to consider. Here the Top 5 mistakes to avoid when using your return to get a new vehicle:
1. Don’t look at it as a windfall to upgrade to a more expensive car.
If you’ve been shopping for a vehicle before you figured your tax refund, stick with that original plan and don’t use this cash as a rationale to upgrade to a more expensive vehicle or additional equipment on your planned purchase. While you think you can afford more car, remember this is a one-time payment and getting a more expensive vehicle will translate to higher monthly payments for years to come.
2. Don’t use your refund as a starting point in figuring out the deal.
While an average refund may look significant as a lump sum, take that number and divide it by the number of anticipated payments you will make over the course of the loan or lease. That big return suddenly looks a lot smaller when you consider how long you’ll be in the vehicle. By sticking to your original deal, save the use of the tax refund until you’ve signed the bottom line. That money then will seem a real windfall in reducing your out of pocket expenses for the down payment and other associated fees in a new vehicle purchase.
3. Wait until you have the check in hand before using it for the deal.
While you may be confident in your calculations on your return, the IRS may have other ideas. Just because your filing may have one figure as the bottom line, what really matters is the check itself, so don’t get ahead of yourself when counting on tax refund money to be part of the deal.
4. Don’t count on your annual tax return as a recurring source of cash to meet car payments or other car-related obligations.
It’s better to treat your refund as a one-time deal. You never know what changes will occur to your situation or the tax code overall. Compared to what you’ll get this year, next year you may get more, less or even owe money.
5. Remember, it’s your money in the first place.
While the forced savings aspect of withholding is viewed as a convenient way to count on some cash each year, keep in mind it’s like giving an interest-free loan to the government. Whatever you get this year, divide by 12 and see how you can use that extra money every month rather than waiting until the following spring to get it back in a lump sum. By adjusting your withholding, you may find that making that monthly loan or lease payment may be a little less painful.
