Tax refunds and what I will do with them

Yesterday, I did my federal tax return using the web-based TaxAct, submitting my taxes for free, and today I filed my state return also for free. I was taken aback by the amount of the refunds I was owed by the federal and state government. When I increased my withholding last year after filing my 2006 tax returns, I figured that I would just about break even with the feds and receive a similar state refund. Well, I was wrong. Although my income increased from 2006, I had additional deductions I could take including an energy credit and I ended up with the same federal refund amount for 2006 and 2007. In addition, my state refund had increased compared to 2006! So what are my plans for the money?

2007 Federal tax refund
As I did last year, I calculated out how much I would have received each pay period if the money had stayed in my pocket. I divided my pending refund by 26 and then decided how I would have used the money if I could distribute it over my many spending categories. Here is the breakdown:
40% will be a 2007 contribution to my Roth IRA
20% will be additional principle paid on my 30-year mortgage
20% will be saved
20% will be spent

2007 state tax refund
My intention was to put this refund toward my Roth IRA. However, this was when the number was a bit lower. Here is the revised breakdown:
11% will be spent
89% will be a 2007 contribution to my Roth IRA

Between the federal and state refunds on top of my monthly deposits to my T. Rowe Price account, the total contribution to my 2007 Roth IRA are 69% of the maximum $4,000. With the cash value of the term life insurance (assuming it arrives soon enough), I will be able to max out my Roth IRA for 2007 and add a bit more to the 2008 monthly contributions.

I am in the third year of my 30-year mortgage so the payment will not make much of a dent in the principle. However, I do like to contribute a bit extra to my mortgage payment and a small decrease in principle will save some on taxes in the long run. Tying up my money in my home is not the best idea so boosting my savings is only to my benefit.

Spending some of the windfall is fine as long as other financial necessities have been taken care of. Since I have purchased a bicycle, I need a helmet. The extra money would encourage me to finally do it. I also have made much of the Pet Poo Converter to help cut down on my plastic bag usage. I will definitely be buying this item!

Both tax returns I requested be deposited electronically. This early in the tax season, I can expect to see my state refund in a few days and the federal refund in a week to ten days. I have not filled the latter electronically before so it may even be quicker than that. Regardless, I should have the refunds in hand for me to make my contributions, savings and buying decisions within the next month.