Karen Goodheart | Assistant Director of Financial Coaching | The Financial Clinic
You may hear the Imperial March in your head when you think of tax season, but fast forward — past the hassle of collecting your paperwork, struggling to keep your heart rate low as you triple check that everything is in order — to the moment when you receive that once-a-year reprieve from the government in the form of a tax refund. According to early 2016 numbers, an overwhelming majority of filers — nearly 80% — received a substantial refund averaging $3,053. Not a bad reward for your past year of hard work! This year, make it even more meaningful using these top strategies for maximizing your tax refund:
1. Faster is Better
Have your refund direct deposited into your bank account — when you go to your tax preparer, be sure to bring your banking information (that is, your bank account number and the bank’s routing number). Having your refund directly deposited is quicker and safer than getting a check in the mail. If you don’t have a bank account, you can have your refund directly deposited onto a prepaid card. (Speak with a financial coach to enroll in a new prepaid card offer which in most cases has no fees plus has a saving capability.)
2. Make it Last
Deposit your refund into a savings account, then set up monthly transfers to your checking account — you’ll have “extra” money each month! Imagine, for example, the average $3,000 refund broken into $250 each month. With this constant flow of money, paying bills has never been easier. You may also want to split the refund from the start to have a portion going into checking to pay down existing bills and the rest into savings to go towards your financial goals.
3. Reward Yourself
You’ve worked hard, and you deserve it! Stay mindful of your financial situation, but don’t be afraid to put some of your refund aside for yourself. Your future self can appreciate it even more — use your refund as the basis for saving for your most passionately held financial goal, like a fabulous vacation, your dream home, or starting your own business.
4. A Fresh Start
A tax refund is a great opportunity to clean up your financial house, paying off lingering debts or finally starting that emergency savings. It’s also the time to rethink your W-4: if your refund was large because you had a lot taken out of each paycheck, consider lowering your withholding so that you can be the one using that money throughout the year. Check out paycheckcity.com for help determining the perfect balance.
5. Double Down on Savings
There are several options to consider that will even help you with next year’s taxes!
- Save for Retirement: Open up an IRA and have all or part of your refund put into the IRA. If you open the IRA or add funds to an existing IRA before April 15th, 2017, the amount you put in will count as a deduction on your 2016 taxes.
- Save for College: Open a 529 account for your children’s or grandchildren’s college education. In New York State, a new law was just passed which allows your tax refund to go directly into a 529 college savings account. You’ll also be able to split your refund so part can go into the 529 and part into your checking or savings account.
- Save year round: If you are struggling to pay your monthly bills or you want to find a little extra each paycheck for your savings, check with your employer’s human resource department to see if changing your federal and state exemptions could help in keeping up with your reality. Remember that your refund may be less come next year, but you will have greater control over your money to meet your expenses today rather than waiting until next year.
Share your favorite uses of tax refunds below!