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Apr 20, 2018

Maximizing Your Tax Refund

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Nothing brightens a rainy spring day (or snowy one if you’re in Minnesota) quite like seeing a refund check in the mail or deposit hit your account from the Internal Revenue Service (IRS). But do you know how you’re going to use it yet? Maybe pay off debt or save for retirement? Consider these eight options below to help maximize your refund.

Pay Down Debt. With interest constantly compounding against you, lugging around high-interest debt like credit card balances can weigh heavily on your financial health. You may not be able to pay off your entire loan balance with your refund but consider using it to make an additional monthly payment. That additional payment will be applied to the principal (the amount of your loan excluding the interest charged for carrying a balance), directly reducing the overall balance of the loan. This can help greatly reduce the length of the loan and reduce the amount of interest compounded over time - often resulting in abundant savings.
 
Bonus tip #1: If you have credit card debt, your best investment is to pay off the entire balance (which includes principle balance and any interest/fees). Can’t pay it off in full with your tax refund? Look into transferring your balance (or balances from multiple cards) to a credit card with a lower interest rate.
 
Build Your Emergency Fund. From unexpected expenses like a flat tire or a broken water heater to unanticipated income-hindering events like an illness or job loss, life happens. And when it does you often feel the strain on your finances. If you don’t have one already, build an emergency fund to prepare yourself financially for the unexpected. Ideally, your emergency savings should cover three to six months’ worth of your living expenses. Saving a portion of or all of your tax refund can start a strong foundation for your emergency fund or boost an existing one for when you really need it. Better yet – put your emergency dollars in an account that could also earn dividends; a great way to add even more to what you set aside.
 
Increase The Value of Your Home. If you’re a homeowner, paying for small updates such as refreshing paint, installing new faucets, or buying new doors with your tax return can help incrementally increase the value of your home without adding another loan to your life. If you’re feeling more ambitious and are looking for a faster way to increase your home’s equity with something like a kitchen remodel, using your tax refund to cover some of the initial expenses could be helpful, too. Here are six other ways to build your home’s equity.
 
Save For Retirement. If you don’t already have one through your employer, you’ve at least heard of 401(K) accounts as an incredible investment tool to help save for retirement. But did you know you can also open your own individual retirement account (IRA)? They function similarly to a 401(k) in their purpose and can have additional tax benefits. In 2018, you can contribute a total of $5,500 to an IRA account ($6,500 if you’re 50+). There are two types of IRAs - Roth and Traditional. Roth IRAs are available to those who meet certain income limits and future withdrawals from the account are tax-free. Anyone can contribute to a traditional IRA but future withdrawals are taxed. Both have pros and cons to consider depending on your personal situation. Figure out which IRA option may be best for you or contact a financial advisor to help you get started.
 
Bonus tip #2: Contributions to a traditional IRA are fully or partially tax-deductible. Keep that in mind when preparing for next year’s tax season.

Boost Your Health Savings Account. If you have a high-deductible healthcare insurance plan, a health savings account (or HSA - a tax-advantaged savings account for medical expenses) is available to you. For 2018, the maximum you can contribute is $3,450 for individuals ($4,450 if you’re 55+) and $6,900 for families. If you are anticipating an upcoming medical need or have some recent health concerns, consider using your tax refund to give your HSA a head-start. Not to mention the comfort knowing you’re prepared for any unexpected medical expenses.
 
Invest It. If you have an emergency fund, a retirement fund, and minimal credit card debt or loans, put your tax refund to work for you! Consider this - the IRS notes that the average tax return in 2017 was $2,895 and if this was invested in the stock market using the average annual rate of return over the last 30 years (11%), in 10 years that would equate to a whopping $8,220. This number more than triples if you were to invest $1,000 more dollars each year over those same 10 years - amounting to $26,782! Calculate your potential savings over time if you invest your tax refund.

Pay It Forward. With birthdays and holidays throughout the year, you may not have the extra funds on hand to donate to a cause that is near and dear to your heart. Your tax refund just might give you the financial flexibility to do so!

Bonus tip #3: Be sure to keep the receipts as your donations might be tax-deductible on next year’s taxes!
 
Invest In Yourself. One way to maximize your tax refund is to invest in yourself! Consider using your tax refund for additional training or certificates related to your career to help increase your income over time. Or take some fun classes for home-based skills – like cooking – to potentially lower bills and improve quality of life.
 
To make the most of your financial well-being, it's important to have a financial plan in place especially when a substantial amount of money comes your way – like a tax refund. You may have already been planning to use your refund to splurge on something special but consider these smart options to truly maximize your refund to ensure for a brighter financial future.

Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date.

Want to learn more about taxes or how to make the most of a refund?

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