How To Maximize Your Tax Refund

by Gary Foreman

How to Maximize Your Tax Refund photo

Don’t waste that tax refund. Use these guidelines to determine how to maximize your tax refund best and put that money to work for you.

Are you wondering how you’ll use your tax refund this year?

While it’s tempting to use a tax refund to treat yourself to some special purchase, in many cases, it’s more important to use the money to pay off bills or make necessary purchases.

And what you do with the tax refund may be less important than what you do with the other bills and expenses that you face. Let’s look at the many ways you could use a $1,000 refund.

Using Your Tax Refund To Reduce Debt

Using a $1,000 tax refund to pay off your credit card could save you $220 a year (assuming a 22% interest rate). So if you can keep the balance down, you’d save that much every year for the rest of your life. (See The Best Credit Card Debt Repayment Options for Different Credit Scores.)

But if you then have to use the card for an auto repair or other purchase soon after, you could end up with the same credit card balance that you started with or more. In that case, you really haven’t accomplished anything.

You can gain an advantage by using the refund to pay down the account that’s charging you the highest rate of interest. Then, put new purchases on the card that’s charging you the lowest rate of interest.

You should continually try to move your debts to the lowest-cost credit card. It may not seem like much, but depending on your balance, you could easily save a few hundred to several hundred per year.

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Spending Your Tax Refund

What happens if you spend the refund? Again, it depends on what you buy and how you buy it.

Anyone who is married with children can appreciate the desire for a vacation with your spouse. But you might be better off planning a date night once each month.

What about auto repairs or a new washer and dryer? You could visit your mechanic and have him install a new radiator. An alternative would be to have your spouse or a neighbor install a radiator purchased at a junkyard. That could reduce the cost of the repair by 50% or more.

It’s possible that the IRS refund could give you some buying leverage. Take the washer and dryer, for instance. If you wait until they break, you’ll probably be forced to buy immediately. Having the refund check available means that you’re a ‘cash’ buyer. That could allow you to drive a better bargain. It would also allow you to look for a good used deal. (See 5 Tips to Negotiate a Better Deal…On Anything.)

Another possibility would be to save the old washer and dryer. Perhaps a $100 service call would buy some time.

The trick is not to use the refund to pay retail and feel wealthy momentarily. Use it to give you flexibility to make it go further.

Perhaps the Best Way to Maximize Your Tax Refund

There’s still one other option for your tax refund. You could use the money for a cash emergency fund.

In most cases, it would be silly to put the money into an emergency fund, even in a high-interest account, while you’re still paying credit card debts at 22%. But, if you could learn to face emergencies without using your charge cards, it could be worth it.

Generally, once a family begins to put big expenses on their credit card, they’ll always carry a balance.

Build an Emergency Fund

With these simple tips and tools, you can build an emergency fund, even while living paycheck to paycheck.

Two final thoughts. Part of every monthly budget should be money set aside for medical, home and auto bills. It might not be easy to set aside $100 or more each month. But it’s essential. You might want to find a part-time job that could generate that much.

You may also want to have your withholding changed if you’re getting a big refund. Remember that the IRS doesn’t pay you interest on your withheld taxes. So, instead of getting a big refund each year, you could use the extra take-home pay to reduce those 20% card balances each month.

Reviewed February 2024

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.

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