In a perfect financial world, your tax return would be a big zero. In that ideal scenario, you would not owe any money to the IRS, and you would not get a tax refund either. The reason is simple enough; the dollars in your tax refund are not a gift from the IRS. That cash is simply being returned to you after the government basically borrowed it all year.
Even so, getting a big tax refund certainly feels better than owing extra money to the IRS. If you need to err on one side or another, it is better to get a tax refund than write that check. And if you do get a tax refund, you can increase its value further with a little strategic planning. Here are some simple ways to make your tax refund work harder all year long.
Pay Off Your Highest Interest Debt
If you are in debt, you will get the biggest bang for your tax refund buck by paying what you owe. To maximize the value of your tax refund, pull out the bills with the highest interest rate and pay them off.
Hopefully, your tax refund will be enough to pay off all your high-interest debt. If not, focusing on the highest interest rate will maximize the value of your refund. If you use your $2,000 tax refund to pay off an 18% credit card bill, you have just earned a risk-free 18% return on the cash.
Add to Your Emergency Savings
You never know when an emergency will strike, and it could be another year before you get another windfall. If you want to make the most of your tax refund, using it to boost your emergency fund is a great place to start. You can further enhance the value of your tax refund by stashing the emergency cash in a high-interest savings account. That way your money keeps earning more money until the day it is needed.
Invest in Your Retirement and Lower Your Future Taxes
With some strategic planning, you could make your tax refund do double duty. Investing the proceeds of your tax refund into a retirement account could put you in a better place financially down the line while reducing your taxes next year. That reduction in taxes could mean a bigger refund next year, or more money to use all year long. No matter which option you choose, you will be more prepared for retirement.
Fund a High Payback Home Improvement Project
Finding the cash for a much-needed home improvement is never easy, but your tax refund could be the answer. If you have been putting off a home improvement project, you may be able to finance it with cash from the IRS. Not all home improvement projects are the same, of course, and some have higher payback potential than others. If you want to use your tax refund to its full potential, look for home improvement projects that will increase the resale value of your home, reduce your energy costs or both.
Start a College Fund
If you have kids and grandkids in the family, starting a college fund is a great way to use your tax refund. It is never too early to start saving for college, and the sooner you start the better off you will be. Even if the grandkids are still in diapers, investing your tax refund in a college savings accounts could be a very smart move. Depending on where you live, you may even earn a tax break on next year’s return.
It may be a hassle, but filing taxes will be less stressful if you end up with a big fat refund. And if you are due a refund, the strategies outlined above can help you make the most of the money.
Is this your first tax rodeo? Check out 10 Tips for First Time Tax Filers.