What would you do with an extra $9,000?

I got a call today from Julie Tripp, the personal finance reporter from Portland's Oregonian. She says the State of Oregon is soon to release the largest "kicker" tax refund in that state's history. The "kicker" goes out to taxpayers - on a prorata basis - when the state determines that it has collected too much in tax revenue. Julie said this year's kicker is in the high-teens (seems like she said 19%). And she wanted to know what I would suggest that clients do with it. Hmmmm...

I think I blew her away a bit when I started by saying, "Well, my average client makes about a half million dollars a year." It's true, but not very quotable since the average taxpaying family makes about $50K per year. But let's assume that everybody in Oregon is a urologist married to a gynecologist (OK, that does conjure some interesting images), and everybody makes about $500K per year (still more interesting).

In Oregon, their income tax is 9%, and the brackets are compressed. Which means the taxes on $500K would come to roughly $45,000. And if the refund were 20% (a round estimate), then the refund would be $9,000.

So what could you do with nine thousand dollars? Here are three suggestions:

  • Take a vacation: That's right. I'm a financial advisor and I actually suggested that you spend the money. But honestly, you work all day serving others, and the chances are good that you're suffering some serious compassion fatigue. So you might log some time in Guatemala or Bali.
  • Fund a non-deductible IRA: It won't get you tan, but the non-deductible IRA will help you shelter some assets from your would-be creditors... the self-same ones who forced you to consider a vacation in the first place. In 2010, you can convert that IRA to a Roth, and it can grow tax-free forever. If you're earning $500K per year, this is the ONLY way you'll get money into a Roth (unless you have one in your 401k).
  • Buy a few months worth of Harvard: Since the cost of one year at a private college is now up to about $40K per year, nine grand will buy you about 2 months worth of college in the far future. Oregon now offers a $4,000 deduction for Oregon taxpayers who contribute to the Oregon College Savings Plan, so this will save you about $360 in tax for 2007. A drop in the bucket I know, but it's a tax break that doesn't phase out with your income.

 

What would YOU do with an extra $9,000?