5 Ways to Celebrate a Tax Holiday

At least 16 states plus the District of Columbia have some form of sales tax holiday planned for 2010, many of them scheduled for August to coincide with back-to-school shopping.

A sales tax holiday is a temporary suspension of sales taxes, often targeted for specific items such as clothing and school supplies. However, despite the back-to-school emphasis in many states, the categories are often broad enough that you can benefit whether or not you are buying for a student.

Smart Ways to Use Sales Tax Holidays

How do you get as much benefit as possible out of tax holidays? Here are five suggestions for doing just that:

1. Plan and budget before you shop. First, check whether your state has a 2010 sales tax holiday. If so, mark it on your calendar. Next, figure out what items you would normally buy anyway are eligible, and plan to buy those items during the sales tax holiday. If you buy items you normally wouldn't just because there is a tax break, you aren't really benefiting from the savings opportunity. Similarly, if you spend more on back-to-school or other items than you normally would just because they are tax-free, you aren't really saving money. So make a disciplined list of necessary items before you head out for the store.
   
   Note that you can be disciplined and still explore new purchases that save you money in the long run. One small example would be switching from plastic bags to reusable bento boxes for lunches. The bento box may cost more initially than a box of 100 plastic bags, but you'll probably spend less over time to pack your kid's lunch.
2. Open a CD that will mature in time for next year's back-to-school shopping. With so many states experiencing budget difficulties, don't count on a sales tax holiday being continued next year. To help support next year's back-to-school shopping--regardless of whether the sales tax holiday is continued--use your tax savings to open a 1-year CD. This will allow you to take advantage of the fact that 1-year CD rates are typically higher than savings account rates or money market rates, while still making the money available to you at the right time next year.
3. Put the tax savings toward your long-term retirement plan. Double up on the tax advantage by adding the money you save in sales taxes to your retirement plan contribution, which may be deductible from income taxes. With bank rates low and stock market returns generally disappointing over the past decade, boosting personal savings rates may be the surest way of catching up with your retirement funding.
4. Rebuild your emergency fund. With the weak economy, many families have had to dip into their emergency funds. If you have fewer than 6 months' worth of living expenses set aside in a safe but accessible place, such as savings accounts or money market accounts, then use your tax savings to supplement your emergency fund.
5. Put the money in your child's college fund. If you are saving money on back-to-school purchases, what could be more appropriate than putting that money toward your child's college education? Most states have tax-advantaged investment plans for long-term educational savings, though if college is imminent, a conventional savings or money market account might make more sense.

It'd be tough to do all of the above, but if you implement the first and at least one other of the above tips, you can celebrate your state's tax holiday in a way that will have lasting benefits.