How to maximize your tax refund

Published April 14, 2016 by Gregory S. Smith

According to the IRS, about  eight out of 10 taxpayers received a federal tax refund in 2015, and we can expect about the same percentage this year. The average amount of a refund last year was around $2,800, a sizable chunk of cash for most people. While you may want to splurge on a big-ticket item, the smartest financial move is to carefully manage your refund to maximize your dollars.  I’ve identified my top tips for how to make your tax refund count, whether you decide to spend it or save it.

  1.      Look at the tax refund as a hierarchy of needs. Take a look  at your circumstances and see if there are any gaps that need correcting.  Are your essential monthly bills covered comfortably? Are you saving the  appropriate amount for your age? If you are married or have children, do you  have adequate insurance protection? Your tax refund can be used to cover any  shortcomings pertaining to these financial basics.

2.      Consider the return on investment (ROI). If you assess that all of your financial bases are covered and you decide to spend your refund, be sure you are receiving a good return on investment with your purchase. In my opinion, spending the money on an experience with family is money well spent. One mistake people often make with a tax refund is to spend it on an expensive object or something that will not gain any value over time.

3.      Make modifications to your W4 according to your needs. Some people don’t realize that they can adjust how much money is withheld from their paycheck on their W4 form by changing the number of deductions.  For example, if you struggle month to month but get a sizable refund in April, you might be better off increasing your deductions. This will withhold a bit less out of your paycheck so that you have more money to put towards your monthly expenses.

And if you’re over-withholding on purpose, what do you plan to do with the refund once you receive it?  If you intend to save or invest, then you might be better off withholding a little less each paycheck and setting yourself up on an automatic savings approach.  That way, you will collect the interest and dividends on your money, rather than the government.

4.      Look ahead. One way to be sure you make your tax refund counts for the following year is to look ahead and think about any major life changes that may be in your foreseeable future. For example, if you’re thinking about buying a home, be sure to take into account that mortgage interest is a big deduction. Planning for these types of deductions will help you understand how much you should withhold and where you should be allocating your money.

5.      Meet with a financial planner. After you receive your tax refund, take time to sit down with your financial planning team to clearly establish your priorities. Be sure to make the necessary adjustments to ensure your money will be put to good use throughout this year and position you for success for the next tax year. Once the calendar turns to the next year, it’s largely too late to make changes that will have a great impact.  Therefore, a discussion with your accountant or financial planner shortly after tax season is recommended. Also, be sure to keep all of the receipts from these meetings, as the money you spend on professional advisors could be tax-deductible for you.

My best advice is to have a realistic mindset of what your tax refund is and where it is coming from.  This could largely influence the way it is spent or used. Remember, the tax refund truly is your money – not found money. It is money you have worked hard for all year long, which deserves thorough financial planning.

Gregory Smith, who is based in Reston, founded The Wise Investor Group’s financial planning department in 1999 focusing primarily on retirement, college, and estate planning for his clients. He is a Certified Financial Planner practitioner and serves as a Financial Planning Mentor to new financial planners through the Financial Planning Association.

The Wise Investor Group and Robert W. Baird & Co. do not provide tax or legal advice. Please refer to your tax professional prior to implementing any tax strategies. “The opinions are those of the author and not necessarily those of Robert W. Baird& Co.”