Getting the Most Out of Your Tax Return

Kate Robinson
Greater Nevada Credit Union

It’s that time of year again… you’ve been working hard like a responsible citizen all year long, paying taxes dutifully, and now you get a little bit of it back. It feels like free money, but remember: this is your money that you earned! Don’t blow it on a fancy TV and go back to living paycheck to paycheck. Here are a few suggestions for how to make the most out of your tax return with investments that will last.

Get out of debt faster. If you’re working toward paying off debts, this is a great way to make a big dent in them and get you closer to your goals. It will also save you lots of money in the long run, by cutting down the interest you end up paying. I recommend setting aside a lump sum dedicated to debt repayment, and pay it all toward one debt instead of devoting a smaller portion toward separate debts. You’re already paying small payments every month to each of your creditors right? So keep making those payments to most, but make one large extra payment to one of them. You can either pay the one with the smallest balance, and then start using the minimum payment for that debt toward the next one you want to pay (known as the snowball method) or you can pay off the debt with the highest interest rate first to reduce the overall amount of interest you pay over time.

Build an emergency fund. A really significant portion of my existing debt comes from unexpected expenses that end up going on my credit card. In the past, it seemed like every time I got close to paying off my debt, I’d suddenly need a brake job (I swear, my truck has some sort of magic destroy-the-brakes mechanism in it). So why not set aside a chunk of your tax refund as an emergency fund to cover those situations. That way you can keep making steady progress toward debt repayment and you’ll be covered in case of emergencies. Plus, you’ll end up paying less for those sudden “you put WHAT in the garbage disposal?” expenses, because you won’t be paying any interest.

Invest it. If you’re one of those who always wants to start saving, but never feel like you have enough in your paycheck, this is a great way to get the ball rolling. It feels good to have a strong base amount saved, and you’ll feel better about any smaller contributions you can make later. Plus if you’re using an interest-bearing account (like a Money Market, a CD, or stocks), your funds will grow faster.

Plan a vacation. What, you thought there weren’t going to be any fun things on this list? It’s totally okay to use your tax refund for some discretionary spending. I just recommend using it for things that will last. So instead of the newest flat-screen, make some memories with your family! Visit Hawaii or Disneyland or wherever it is your kids have always wanted to go and may be too old for soon (who am I kidding? No one is too old for Disneyland). Take lots of photos and video. Spend a little extra to get a photo book of the trip made. Memories are more valuable than anything you can buy at the mall.

Give back. Many of us (hopefully all of us) want to make a difference in the world. Sometimes our own finances are so stretched it seems like we can’t help anyone else. So take advantage of the opportunity while you can. Find a worthy cause (my favorite is Charity: Water) and change someone’s life! That’s an investment you may never personally see the returns on, but you won’t regret it and the results can be much more far-reaching than you realize.

Plan for future expenses. Do you have major expenses later in the year that always seem difficult to cover? Set aside a portion of your tax refund for back-to-school expenses, Christmas presents, or other items that always seem to creep up on you. Imagine the relief when August comes and you don’t have to stretch your monthly budget so you can afford back packs, clothes and pencils (or iPads, or whatever kids use in school these days).

Get something you’ve been needing. I know it’s tempting to go clothes-shopping as soon as your refund hits the bank. But if you’ve been putting off dental work, or new tires, or any one of a long list of expenses that always go on the “when I can afford it later” list, now’s the perfect time to check them off.

Refinance your house. This is one of my favorites. Refinancing can be a great opportunity to save yourself thousands of dollars in interest over the course of your mortgage loan. But since you still have to pay closing costs and fees when you refinance, it never seems like quite the right time. So using your tax refund to pay those closing costs is a great way to make sure your refund keeps paying you long-term.

Make adjustments so you don’t get a refund next year. Yep, you heard me right. It’s called a refund because you actually paid too much in taxes last year, so you’re getting some of what you’ve already paid back. While it’s super nice to get that big chunk of change every year (for all of the above reasons), it may also benefit you to have that extra money in your paycheck every other week. The amount you pay in taxes is determined by the number of withholdings you specified on your W-4 with your employer. There are online W-4 calculators that can help you determine if you’re paying the right amount. If you’re overpaying, you could adjust the number of withholdings. You wouldn’t get a tax refund next April, but you would see an increase every month in your paycheck!

04/25/2014