3 Ways Your Earned Income Tax Credit Can Level Up Your Finances (And How to Spend It Wisely)

Johnny Monroe

April 8, 2024  •  3 Minute Read

Taxes

Congratulations, you filed your taxes! Now you have that much-anticipated tax return waiting for you. But before you splurge on a fancy vacation or that new gadget you've been eyeing, let's talk about how to leverage your Earned Income Tax Credit (EITC) to truly boost your financial well-being.

Maximizing Your Return with the EITC

The EITC is a refundable tax credit specifically designed for low-to-moderate income earners. It acts as a financial safety net, reducing your tax burden and putting more money back in your pocket. Think of it as a reward for your hard work!

Here's a breakdown of the EITC:

Eligibility:

-You must have earned income from a job.

-You need to be a U.S. citizen or resident alien.

-Your income must fall within specific ranges based on your filing status and the number of qualifying children you have.

Credit Amount:

-The amount you receive varies depending on your income, filing status (single, married filing jointly, etc.), and the number of qualifying children in your household.

-The IRS provides tables to help you estimate your potential EITC credit.

Claiming the Credit:

-Make sure to claim the EITC when you file your taxes. If you use a tax preparer, let them know about your eligibility. There are also free tax filing resources available if you meet income requirements.

-Now that you understand the EITC, let's explore some smart ways to put your tax return, including your EITC, to work for you:

1. Build a Solid Financial Foundation: Secure Your Credit Score

Your credit score is a crucial number that impacts your financial life in many ways, from loan approvals and interest rates to renting an apartment. If you have a low credit score or no credit history, a secured credit card can be a game-changer.

Here's how it works:

-You make a deposit (usually refundable) which becomes your credit limit.

-Use the card responsibly, making on-time payments and keeping your balance low.

-With consistent good habits, your credit score will gradually improve over time.

Actionable Tip: Check out our secured card options to find an offer that fits your needs.

2. Prepare for the Unexpected: Create an Emergency Fund

Life throws curveballs. An emergency fund acts as a financial buffer, protecting you from unexpected expenses like car repairs or medical bills. Aim to save 3-6 months' worth of living expenses.

Here's how to get started:

-Open a high-yield savings account specifically for your emergency fund.

-Automate your savings by setting up a recurring transfer from your checking account.

-Prioritize building your emergency fund before making any significant purchases.

Actionable Tip: Research different high-yield savings accounts and choose one with a competitive interest rate and easy accessibility. Consider starting small with a weekly or bi-weekly transfer and gradually increase the amount as your budget allows.

3. Break Free from Debt: Conquer High-Interest Rates

High-interest debt, like credit cards and student loans, can quickly snowball and hinder your financial progress. Use your tax return to make a significant dent in this debt.

Strategic Debt Repayment:

-Focus on the highest interest rates first. This method saves you the most money in the long run.

-Create a debt repayment plan that fits your budget. Consider the snowball or avalanche methods.

-Once you eliminate high-interest debt, use the freed-up money to tackle lower-interest debts or continue building your savings.

Actionable Tip: Calculate your total debt and interest rates. List your debts in order of highest interest rate to lowest. Use your tax return as a lump sum payment towards the debt at the top of your list.

By following these tips and using your EITC strategically, you can transform your tax return from a temporary boost into a springboard for a more secure and prosperous financial future. Remember, small, consistent steps lead to big results!