Maximize Your Tax Refund by Following a Few Simple Steps
According to the most current data reported by the IRS, the national average tax refund is $2,860 for the 2016 filing season. You might look at that number, nod to yourself and exclaim, “Not a bad chunk of change!”
While it’s true that nearly $3,000 is nothing to scoff at, that number represents an interest-free cash loan you made to none other than Uncle Sam (on your father’s side of course).
If you had a job with a monthly paycheck in 2015, that means you were overpaying the government $238.33 per month!
That’s a lot of chocolate!
It’s also a lot of money you could have used or invested otherwise. Luckily, it’s possible to get that money back by filing your tax return. Although you can’t get back what you lost in interest payments, you can plan ahead for next year by following these simple steps:
#1. Minimize Your Tax Withholdings!
The first step in making the most of your tax savings is to minimize the interest-free loan you give to Uncle Sam each year. The reality is that your taxes are due in prepaid installments (i.e. withholdings) as you earn income throughout the year. However, the amount of those withholdings is not necessarily fixed.
Instead, they are determined by how you fill out the W4 form your employer gives you at the start of the work year. Be sure to fill this out accurately so that you don’t pay too much in withholdings or pay too little, which would mean you owe taxes.
#2. Put Your Tax Refund Away
The next step in maximizing your tax savings is simple.
Don’t spend it!
Put your money away, out-of-sight, out-of-mind and out-of-reach. For some people that means putting it under their mattress. For others, it means putting it in a safe in the basement next to their little league badminton trophies.
Regardless of where you put your tax savings, the main point here is to get it out of circulation. Pretend as though it doesn’t exist. Which brings us to the next point:
#3. Don’t Just Put Your Refund Anywhere
Be a little picky about where you put your tax refund. You may have a savings or checking account with your main bank, but that doesn’t mean you have to put your refund there. As the old adage goes, “Don’t put all your eggs in one basket.”
Your bank might have great customer service or a free checking account, but that doesn’t mean it has great interest rates for savings.
According to Valuepenguin.com the average Annual Percentage Yield on a low balance savings account in 2017 is a mere 0.2 percent.
At that rate, the average $2,860 tax refund would yield a paltry $5.72 per year.
By staying away from these low APY products, you can increase your savings tenfold. Some examples of low-risk investment products with high APYs include the following:
High-yield Savings Accounts
These include regular savings accounts as well as money market accounts, both FDIC insured, which can have interest rates of up to 1.1 percent with minimum balances from $0.
With an average tax refund of $2,860, that amounts to $31.46 per year. That’s 5.5 times more than the return you’ll get from an average low yield savings account.
Certificates of Deposit (CDs)
CDs are another FDIC insured way of investing long or short term. CDs usually have a minimum deposit amount and a minimum deposit term length. Depending on the bank, the term length and minimum deposit will determine the APY. However, the available rates and requirements can vary quite a bit.
For example, a Capital One 360 CD has a $0 minimum deposit and an interest rate of 2 percent for a five-year deposit term length. That’s $57.20 per year.
Individual Retirement Account (IRA)
A traditional IRA is used to defer taxes for payment at a lower rate after retirement. The catch is that you can’t touch the money until you retire. If you do, you’ll have to pay early distribution penalties and income tax.
If you haven’t maxed out your IRA contributions by the time you receive your tax return, you can contribute your refund to your IRA and enjoy higher returns.
According to the Stern School of Business at New York University, the yearly return of the S&P 500® in 2016 was approximately 11.74 percent. The ten-year average was 8.65 percent. For an IRA based on the S&P 500®, that’s at least $247.39 per year, assuming you invest an average tax refund amount.
Mutual Funds are professionally managed investment portfolios that, like IRAs, are intended for long-term investors. They can include a mix of indexes like the S&P 500®, simple stocks, bonds, securities and other financial instruments.
The major differences between mutual funds and IRAs are that mutual funds often have expense fees (called expense ratios), their dividends are not tax deferred, but you can withdraw funds without a penalty.
Being such a diverse category, it is difficult to say what the average return on a mutual fund was in 2016. However, if we invest our tax savings in a mutual fund that is largely based on the S&P 500®, the projected approximate interest per year will be $247.
#4. Pay Off Credit Card Debt
According to NerdWallet the average household with credit card debt owes $16,061. An average tax refund could be used as a payment to reduce that debt by nearly 18 percent.
Additionally, with the average credit card interest rate at approximately 15 percent per year, that same payment would save $429 in interest fees annually.
#5. Invest in Yourself
Making financial investments isn’t the only way to maximize your tax refund. You don’t .
Enhance Your Career
Investing in your career is one of the best ways to invest in yourself. For example, Tom’s IT Pro has a list of certifications for mobile app developers, which range in price from $127 to $1,149. With an average tax refund, you can probably do them all. Of course, certifications don’t guarantee a pay raise, but they can make your job easier by forcing you to hone your skills.
But what if your career is not “upgradeable”?
Not all of us have jobs for which certifications exist, but that doesn’t mean you can’t invest in yourself in other ways.
Enhance Your Health
The health benefits of Yoga are well-documented. A yearly Yoga membership at a national chain like YogaWorks or CorePower Yoga costs approximately $1,672.71 before any discounts. Joining a boxing gym or hiring a nutritionist are also great ways of investing in your health to prevent sickness and decrease your medical expenses.
Enhance Your Mind
You can also enhance your life through your tax refund with a project management program or by taking cooking classes (everybody’s gotta eat!).
Let Us Know If We Should Add Something
This is, by far, not a comprehensive list of profitable and affordable things you can do with your tax refund (we didn’t even mention drones!). If you’ve got a good suggestion, let us know. In the meantime, share these suggestions with your friends using the handy infographic below:
This infographic is a part of the Couponbox Don’t Tax Yourself! tax guide for individuals. See more tax-related data and advice here.
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