Monday, January 26, 2015

Tax return dilemma

I have been working on our taxes this week and am expecting a sizeable return mostly due to the major move expenses last year. I had been mentally reserving the tax return to pay for some upcoming medical expenses we are going to incur next month when one of our boys has a procedure. I know we can expect at least the $1000 deductible and possibly another $1000 in co-insurance. The bills will start coming in towards the end of March and we can reasonably put them off for another couple months before we have to either pay in full or set up a payment plan. So let’s say they are due at the beginning of June which gives plenty of time for all the tax returns to have been paid out.
June is also when the remainder of our credit card debt (currently $4,300) goes from 0% interest to 8.99% interest. I’m highly motivated to pay the credit card off this year and particularly motivated to pay off as much as possible before it starts accruing interest. Putting the tax return money towards could knock out a significant portion of the debt in addition to the minimum payments and whatever extra we can squeeze out of our budget each month.

So do we pay off medical expenses or do we pay down the credit card debt?

Pros for paying off medical expenses

No new debts. If we didn’t pay off the medical expenses we would be adding a new debt to the list which would be damaging to the mental game of crossing off the debts.

No increase in minimum payments each month. Our budget is really, really tight each month. An increase in the minimum amounts we owe on debt would be a hardship and would make it more difficult to come up with “extra” payments to continue to chip away at the remaining credit card debt.

Pros for paying down credit card debt

Paying off the credit card will be a huge accomplishment for me as I’ve been juggling credit card debt for my entire adult life. Using the returns to pay it down will help us get it done as fast as possible and give me a boost to keep at all the other debts.

Credit card debt is going to start accruing interest, the medical debt will not.

Medical expenses are not on the credit report while the credit card debt is a negative mark on the report. We’re not planning on taking out any additional loans at this point so this may be a neutral point but it’s still nice to have better credit in case the need arises.

Both options offer positives and negatives. I’ve got some time to decide, especially since I still have to complete the taxes before I can expect the returns to start coming in. I’m keeping my fingers crossed that the returns exceed my expectations and the medical bills are under what I am expecting, that way I could pay off the bills and still have some leftover for the credit card debt!

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