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Best Ways to Invest this Year's Tax Refund back into Your Home

by Marcus Pickett

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Over the next few months, tens of millions of refund checks will be delivered to Americans of all stripes: dual-income families with three kids, the small business owner with two mortgages and college tuition payments, the single parent who saw in the housing market the first opportunity to buy a home. Depending on whether you believe opinion polls or retail sales figures, the average taxpayer will use this money to pay down debt or go on a shopping spree, but many home improvements combine a solid financial investment with personal pleasure.

HomeAdvisor—leading online resource connecting homeowners to home improvement contractors—tracks project costs from feedback provided by actual homeowners who have completed actual projects. While some industry sources quote estimates from projects of "average" design, these numbers reflect project costs from homeowners and contractors working within a budget just like yours.

Households with a $2,500 Refund
Early statistics from the IRS suggest the average refund right now is closer to $2,600, although the number usually comes down as the date gets closer to April 15th (taxpayers who know they're getting a refund tend to file early). If you tend to fall into this category and received a similar amount last year, here are some ideas to put that money back into your home.

Install a Hot Tub ($2,067): Naturally, you can break the bank with a luxurious, bells-and-whistles hot tub, but if you're just looking for a way to create a relaxing soak at the end of a hard day, the cost for a hot tub installation can be easily covered by the average refund.

Solar Water Heater ($2,475): These systems will cut down on your monthly bills, provide hot water for your home and/or swimming pool, and help the country work toward sustainable energy consumption. If the system provides 50 percent of your water heating, isn't used for hot tubs or pools, and is certified by the Solar Rating and Certification Corporation (SRCC), the federal will effectively pay for 30 percent of this cost with a green tax credit.

Households with a $6,000 Refund
This household uses their tax refund as an annual "savings plan." Although dollar-for-dollar, accountants will tell you this is a mistake, for many people—especially employees without a 401k retirement plan—the IRS can serve as a nifty way to accrue savings. Intentionally having more taxes withheld on your W-4, such as failing to declare dependents, is the most common way taxpayers create these refunds.

Revitalize Your Yard ($4,079): Hiring a landscaping company may not be your first thought when it comes to your tax refund, but it offers more punch than you think. Comprehensive services will remove a huge item off your spring cleaning list and enhance your home's curb appeal. Or, you can hire a company to install a single landscaping feature. The average cost for a custom-built pergola or trellis: $3,967.

Wood or Laminate Flooring ($5,106): There's nothing like the look, feel, smell, and longevity of hardwood flooring. For kitchens, living rooms, dining rooms, and bedrooms, many wood species can allow you to complete a project well within this budget. If you have a larger flooring project in mind or can't justify the cost of real hardwood flooring, the average laminate flooring project cost $3,899.

Households with a $10,000 Refund
This year the most common way to receive a refund of this magnitude is through the $8,000 first-time, home-buyer tax credit. (The IRS announced on Feb. 25th that homeowners who have already bought a house this year can take advantage of the credit on their 2008 returns.) Combined with the average refund these Americans were already receiving, a $10,000 refund is on the way for thousands of new homeowners.

Build a Deck or Porch ($7,572): The personal benefit of a deck or porch makes this an easy sell. Decks and porches also allow for incredible flexibility in cost and design. Work with a contractor to match your budget and desired utility. Spend a little more money for composite decking and you can reduce the maintenance to a minimum.

Bathroom Remodel ($9,712): Still one of the best projects for value, if you're looking to immediately upgrade an area of a recently purchased home, this is a great place to start. As part of the first-time, home-buyer tax credit, you have to stay in the home for at least three years, so the promise of future property values makes this project a solid investment, anyway.

Tips for Small and Zero Refunds
First, congratulations, if you stuck your extra income into an interest-bearing account; you've made a wise choice, even though it may not feel like it this time of year. If you've managed to secure a small refund, there may still be worthwhile projects to choose from. Rather than hitting the hardware store and dealing with wall anchors, you can have a professional surround sound system installed ($550), hire a handyman for the day ($481), install a garage door opener ($348), or hire a professional to open your pool this year ($334). Finally, if you've completed an energy-efficient upgrade in the past, you may be entitled to a green tax credit that you failed to claim. Although, these credits didn't apply last year (2008), even insulation, doors, and roofs that were installed and met energy-efficient standards during 2006-07 could allow you to amend a previous year's returns. Use this link for more info.: http://www.energystar.gov/index.cfm?c=products.pr_tax_credits

Marcus Pickett is a professional freelance writer for the home remodeling industry. He has published more than 600 articles on both regional and national topics within the home improvement industry.