What to Do With Your Tax Return Money

Apr 18, 2023 3 min read

It’s that time of year again. The snow is melting, the daffodils are popping out — and you’re getting your tax return back! While it may be tempting to indulge in a shopping spree, try to avoid the lure of instant gratification — a tax refund used wisely can set you up to be in a better position in the future. 

Tax Return Dos and Don’ts

If you’re getting a windfall from the IRS, here’s how to make sure your money continues to work for you.

Let It Grow

While saving is a great idea for any extra money that comes your way, sticking it in an envelope inside your sock drawer isn’t the best way to do it. While you have the money in a (relatively) safe place, it isn’t doing anything else for you — like compounding interest and making you more money. One of the best ways to spend your tax return is investing it in your retirement account.

Do: Talk with a financial advisor to find out what options you may have for maximizing your tax refund in a fund or account that will accrue interest. Many retirement savings fund options exist, including 401(k) funds, IRAs, mutual funds, annuities and more.

Plan Ahead

There’s nothing wrong with using your tax return money to purchase something, but try to avoid the impulse buys. Decide ahead of time where you’ll spend the money: on some valued time away, a large investment in your vehicle or home, a special event or even on a big-ticket item you couldn’t normally afford. If you’re wondering what to buy with your tax refund, the best solution is to buy nothing. Set it aside until you’re able to think through your finances and plan something that makes sense.

Don’t: Spend it on extravagant impulse purchases. Flying to Vegas and catching a show sounds like a fun, impulsive weekend getaway. However, the impulse buy can sometimes cost you more in the long run. Going into more debt to go on vacation or to a fun event isn’t anyone’s idea of a good time. Splurging on a concert might be fun in the moment, but those VIP passes may not bring you the most bang for your buck. Figure out how you can budget your tax return ahead of time.

Diversify Your Spend

Still not sure how to spend your tax refund? Use your refund to work on several financial goals. By looking at the big picture and greater good of your financial future, you may uncover options for stretching those extra dollars.

Do: Consider splitting your tax return between some of the following:

  • Putting some of the money toward a large purchase or upcoming expense, like an appliance or a wedding.
  • Contributing to home renovations, which could improve the value of your home.
  • Adding some to a retirement fund like a Roth IRA, which will give the interest accrual process a little boost.
  • Buying a life insurance policy that will help give you and your family some peace of mind.
  • Paying off debt, starting with high-interest debt like credit cards.
  • Building up your emergency fund.

Start Your Own Business

You don’t have to quit your current job to start your own business. Even part-time side gigs require a bit of investment, and a tax return is a great way to fund your passion projects. Use your tax refund to build up inventory, design a website or online store, or anything else that allows you to turn a hobby into a money-making enterprise.

Don’t: Force the issue. If you don’t already have something you do on the side, this isn’t the time to come up with a project on a whim. It’s better to invest in something you already do. 

Invest in Your Skill Set

A tax refund can be the tool you need to level up your career. If you're noticing that the jobs you want require skills or certifications that you don’t have, the refund check can go toward tuition for courses in those subjects. By taking advantage of the Lifetime Learning Credit, you may be able to use the costs of the course to take money off your taxes again next year.

Do: Check the IRS website to be sure your courses qualify for the credit. As of 2023, it is worth up to $2,000 per tax return and there is no limit on the number of years you can claim the credit.

Plan for Your Financial Goals

There’s no hard and fast rule when it comes to spending your tax return. It can be a fun bonus to your budget, but it could also help you get a little closer to your long-term goals if you use it well. If you would like some ideas on how to create a plan to help you meet your financial goals, contact your Farm Bureau agent or advisor today for more information

Neither the company nor its agents give tax, accounting or legal advice. Please consult your professional advisors in these areas.

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