Many Happy Returns

Rethinking the value of your tax refund

Tax refunds are a welcome sight; after all, most people feel better receiving money from the government rather than writing a check at the end of the year.

Unfortunately, a refund isn’t necessarily cause for celebration and, if you spend that money, you may only compound the problem. Understanding the mechanics of tax refunds and optimizing your returns for next year could have a much more significant long-term impact on your account balances.

Don’t Shoot for a Refund

The best refund is the smallest refund. Any extra tax you paid during the year can be viewed as an interest-free loan to the IRS. The opportunity cost is potentially high. That sum could have been invested, potentially earning a significantly higher return.

To find a more exact estimate, talk with your CPA in detail to review your return (paying attention to where your excess payments originated) and figure out whether this was an anomaly or a situation that may recur. You want to pay just what you owe, not more or less.

Important disclaimer: Nemes Rush is not a tax preparer, and specific decisions about declarations and filing your taxes should be made in consultation with a trusted tax professional.

Pay it Forward

Business owners and 1099 employees typically make quarterly estimated payments in accordance with their tax projection for the year. One way to put your refund to good use is to pay your tax obligation for the coming year. That way, you’re neither anchored to your larger account balance nor likely to spend the direct deposit.

Another option is to use your refund to pay down any variable- or high-interest-rate liabilities, like credit cards or car payments. In a higher-rate environment like today, paying down debt goes a long way.

Fund Your Investments

Once the above boxes are checked, consider investing the remaining refund balance. That may mean maxing out your IRA or increasing your 401(k) contributions given your higher cash balance at the bank.

Refunds can also be put to use through your Health Savings Account. The tax-advantaged nature of HSAs makes them a prime target for extra cash, and you’ll sleep better knowing you have something set aside for a rainy day.

Be sure to discuss these spending and investment decisions with your advisor, who will be able to help you make the right decisions with your long-term goals in mind.

Find the straightest path toward your goals. 
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“Advisory services offered through The Nemes Rush Group LLC. Securities offered through J. Alden Associates, Inc., member FINRA/SIPC. The Nemes Rush Group LLC and J. Alden Associates Inc. are not affiliated. The information presented is for informational purposes only. Please consult your tax professional to determine the tax effects on your personal situation prior to making any investment.”

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