A cool way to use your tax refunds

by J. Money - Published February 19, 2020

wad of cash

Morning!

Saw this comment come through and it reminded me to get my a$$ in gear and finally wrap up my own taxes ;) How are you doing with yours? Getting any refunds back?

Here’s an idea of what you could do with it if you are:

Thanks to earned income I get a tax refund of anywhere from $4k to $7k per year.

I use that tax return to pay all my bills for a year.  I multiply my cell, internet, Netflix, and car insurance by 13 months (I like an extra months padding), then take that amount and add the cost of my contacts and vision exam, dental costs, and life insurance.  I then deposit that amount into a Capital One 360 account.

Every month I sit down and pay my bills directly from that account.

– MB

BOOM! How’s that for a refund strategy?! Using it to pay your NEXT YEAR’S EXPENSES in full! Minus your mortgages or loans or important stuff like food, of course, but still – pretty clever :)

I tend to go the more boring route and just funnel any extra refunds into maxing out my IRA for the year so it feels like I’m getting it for free (hah!), but whenever I break even that’s perfectly fine too.

Just so long as I never OWE MONEY at the end of the year!!

I’ll do anything to avoid that pain, even if it’s just psychological, haha… And I bet that’s why others prefer getting money back at the end of the year vs having to pony up some as well… Getting money that feels *free* is always much more exciting to spend or save when you get it in a chunk like that! So if it helps you propel your goals by “giving the gov’t a loan”, so be it! There are worse ways to get that scratch!

That’s how I look at refunds, anyways… How about you? Have any mantras or strategies of your own with tax management? Do you use refunds to take nice vacations or pick up fancy toys you wait all year to finally get? :)

I’ll be honest and say I’m always a bit envious of those who can spend their refunds freely like that without any guilt… I like to think that everyone doing this has already rocked their finances all year so this is their one reward for doing so, but I’m not naive enough to think that’s actually the reality ;)

But if this IS you, I salute you with both hands and feet!! That’s a great balance to achieve and I need to be better about it myself!

{ 37 comments… read them below or add one }

1 SWFL Financial Coaching February 19, 2020 at 6:45 am

Usually, I put the money into an IRA for the previous year (if it wasn’t already maxed) once I know how much I will get back. This makes the refund even bigger.

This year the money needs to sit in the HSA to pay for a baby in August. This could be boring or exciting, depending on who you are.

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2 J. Money February 19, 2020 at 7:02 am

Heyyyy congrats, man! Definitely exciting! :)

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3 Nick February 19, 2020 at 7:50 am

All these strategies for using large tax refunds go up in smoke when someone steals it. Then you spend the rest of the year dealing with the IRS in the hopes to fill that large pothole in your finances.

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4 J. Money February 19, 2020 at 9:56 am

Whatcha mean? Like steal-steal?

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5 J February 19, 2020 at 12:52 pm

I’m guessing he is referring to identity theft. Filing tax returns under other people’s names and running off with the refund money is a crime that is rising in popularity. That is another reason that it is a good idea to deal with your taxes as early as you can without risking missing reporting on tax forms that come in later. It reduces the risk that someone else can file under your name.

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6 Nick February 19, 2020 at 3:43 pm

^^^ This. I thought tax return identify theft was more common knowledge. Which is why I roll my eyes any time I see someone fixing their withholdings to purposely get a huge return each year.

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7 J. Money February 20, 2020 at 2:19 pm

Oh damn! Has this happened to you or you just putting it out there??

First time I’ve heard of this and I’ve been blogging about $$$ for 12 years!

(And good point about filling early in this case, J!)

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8 George February 25, 2020 at 8:39 am

I hear that, except the IRS is the one that steals it :(

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9 kellie February 19, 2020 at 7:54 am

Mine went directly into my emergency fund. I’m about 3 months away from having a 6 month fund for current expenses set aside.

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10 J. Money February 19, 2020 at 9:26 am

Nice!! That’s gotta feel good!

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11 Christine February 19, 2020 at 7:58 am

I’m one of those people who rarely gets much of a refund, and on occasion has had to pay. At least in the last few years. Not on purpose, mind you, because, yeah, it’s difficult psychologically! (I’m going to use that concept that paying taxes is patriotic that I read about here to take away the sting). Because of all that, I’ve been putting off doing them. When I do get a refund, it just goes in a savings account. So I’m boring!

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12 J. Money February 19, 2020 at 9:30 am

It’s def. harder to motivate yourself when there’s a chance you have to pay, lol…

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13 Nora February 19, 2020 at 8:44 am

Is Amy Dacyczyn and The Tightwad Gazette familiar? I remember reading her book, where she observed that getting a tax refund is like giving the government interest-free use of your money for the year.
It stings to have to pony up more at this time of year, but I turn to this thought as a salve. As long as the extra tax money is on hand, it doesn’t sting that bad.

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14 J. Money February 19, 2020 at 9:35 am

An OG of personal finance!

I’m totally cool with breaking even at the end of the year too, but only if you end up doing something GOOD with the money throughout the year which most people don’t really do :( So if getting a chunk at the end increases the odds of using it better I’m 100% for it.

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15 Megan February 19, 2020 at 9:05 am

This is a neat idea! Our refund will probably be more in the $1-$2k range (haven’t actually sat down with the tax stuff yet, though I’ve put all the documents in a manila folder as they’ve arrived), which I expect will go in savings towards our trip to Arizona this fall for my brother’s wedding. We were hoping to make it to Disney this year but little bro had to go and get engaged on NYE (kidding, I’m really excited about having another sister-in-law). Anyway, hoping to check the Grand Canyon off the bucket list while we’re there so that will be a bonus.

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16 J. Money February 19, 2020 at 9:37 am

Haha, nice…

I do the same thing too w/ tax stuff – just throw it all in ONE central place so I know exactly where everything is when it comes time to sit my bottom down :) It’s so stupidly simple but saves you hours of frustration!

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17 COD February 19, 2020 at 9:33 am

I’m getting $500 back from Fed and State each – so it worked out pretty close to perfect this year. I’ll just move it straight to the IRA. (Individual Retirement Account, not Irish Republican Army)

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18 J. Money February 19, 2020 at 9:39 am

Nicely done, sir!

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19 Adam February 19, 2020 at 9:43 am

The state always owes us about $500… and we always owe the feds about $1500. So it goes. Honestly we should be taxed a bit more, given how many digits we’re looking at for a deficit in 2020, but I don’t want to start one of THOSE discussions in your lovely comments section. ;)

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20 J. Money February 19, 2020 at 9:47 am

yes, thank you for that, haha…

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21 MAR February 19, 2020 at 10:08 am

So my second refund since my divorce and I got a chunky Fed return. I always had the goal of being $100 of paying and receiving. I have not figured out how to change my W4.

However, my ~$2500 Fed refund will go directly into my savings account which was depleted this year for part of my son’s College tuition. I am thinking about taking my state refund of ~$400 and purchasing either a robotic vacuum or an iPad mini, both which are on my want list for after son’s 4 years in college.

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22 J. Money February 20, 2020 at 2:20 pm

I think after 4 years of hooking your son up like that you’re more than allowed to treat yourself here ;) In fact, I would get BOTH lol.

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23 Lisa February 19, 2020 at 10:11 am

If we get a refund we use it to pay for the kids camp. Usually it is a wash between what we owe vs get back.

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24 stephanie t February 19, 2020 at 11:16 am

Well…last year the state of California owed me the grand sum of $217. Which made me happy dance all day! The Fed owed me approximately the same so I usually take my huge refund and put it in my savings. When I had a car payment, it always went directly there.
I’m one of those people who just can’t grasp giving the feds a loan during the year so I try really hard to minimize my tax exposure. I check in June/July to make sure I’m pretty close to on target and have managed pretty darn well. Except the time when I made $10,000 in overtime in the last quarter of the year. Hello, maximizing my contribution to my 403(b).

Nick-my heart goes out to you! When I first moved (over 15 years ago) I found out that someone had helped himself to my SSN in California. It took me 7 freaking long damn years to straighten that out with the state…I WILL say, in all fairness, the feds resolved it within 6 months. I wish you a speedy resolution Nick. (I’m really good with prayers too, if you think that will help.)

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25 J. Money February 20, 2020 at 2:21 pm

Still can’t believe this tax scam thing is a THING!! UGH!

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26 DeeFuller February 19, 2020 at 1:06 pm

We owe about $3,000 to feds, $500 to state we live in, and receiving a refund of $1,800 from the state DH works in. Will use the state refund to offset federal taxes owed. I was looking into adjusting DH withholding, but the w4 form changed drastically for 2020. I don’t want to bother with it because we itemize every year. Will probably talk to payroll to get our withholdings adjusted.

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27 J. Money February 20, 2020 at 2:40 pm

That’s a good idea talking with Payroll/HR! Could also ask your accountant if you use one as I’m always bothering mine :)

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28 SL February 20, 2020 at 11:36 am

I try for as close to zero as possible. this year I think I am getting about $50, especially because of all of the new laws that lost me a lot of my itemizations.

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29 J. Money February 20, 2020 at 2:52 pm

Yeah – those laws do no good in trying to break even for sure… Seems like they’re ALWAYS changing too!

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30 JoeTaxpayer February 20, 2020 at 3:17 pm

I’m not a fan of the refund.

When my boss (the job I retired from in 2012) told me “my tax guy is great, he got me a $5000 refund this year, and last year’s was $4500,” I walked away thinking they are both morons.

Getting a refund of such magnitude most often means poor planning. Yes, interest on checking is low, but it’s tough to walk away from the data showing that the average credit card balance is well over $3000. So, if the same people happy to get a $3000 refund are the ones paying 24% on that same $3000 they carry on their credit card, then something is wrong.

If they are happy to use this zero interest piggy bank to save for an annual windfall, I’d hope they also see it for what it is. My goal each year is to owe as much as I can and pay no penalty. This April, I’ll actually write a huge check. But that’s no problem, as that money served its purpose for nearly a full year. To SL’s comment, yes, zero is good, too.

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31 J. Money February 20, 2020 at 3:29 pm

Hard to argue with someone who’s early retired :)

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32 Liz February 22, 2020 at 4:53 am

I’m getting a large refund and I planned it. My husband’s military he makes about $45k in taxable income minus 3 months of pay from working in the middle East taxable income now $33750 minus the 8000 in his tsp taxable income 25750+1200 in interest plus some div our tax was -25% we have 2 kids and I am a stay at home mom. The tax law is insane. We are using it to buy 2 years of prepaid college tuition for our youngest. The rest goes towards paying cash for a second vehicle when we move somewhere I can’t bike easily.

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33 J. Money February 24, 2020 at 6:15 am

You’re a great planner! :)

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34 Bo February 22, 2020 at 1:20 pm

This is a great idea. I was sitting around with a group of friends last night discussing this topic of what to do with this year’s tax refund. While some had already burned theirs, the rest of the consensus was to toss it into an investment account or to “pay ahead” bills as you discussed here. Great post!

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35 Dani February 24, 2020 at 9:20 am

I’m surprised that nobody has fessed up to their personal lack of willpower and intentional refund as a forced savings. I’ll be the first to admit that it’s way easier to pay down debt than to save as aggressively as when I was in debt paydown mode, but having a forced savings can be beneficial in that it will help you save up enough for that car or trip or whatever it is that was so elusive before.
Honestly, though, our taxes seem to be different every year–which doesn’t make sense because our situation doesn’t change from year to year. Some years we owe (as much as $3000), and other years we get refunds back. Personally, I’d rather get a refund than owe that much, any time! We generally turn around and drop that into the Roth to get ahead for the year.

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36 J. Money February 24, 2020 at 9:34 am

It’s def. easier to pay down debts than to save! I remember doing a poll here years ago and if I recall a majority of people thought the same :) Which is weird because saving is a LOT more fun, but I guess there’s no built-in goals or killer interest to help motivate you as much like debts have?

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37 Todd Christensen February 28, 2020 at 11:31 am

I’ll fess up! There have been years in the past (fortunately they are becoming distant past) where tax refunds were spent completely on vacations and fun. More recently, we’ve been using a modified version of the Tax Refund Pyramid that recommends these starting points for using your tax refund:
30%: Needs (repairs, replacements, etc.)
25%: Debt Repayment
20%: Short-term Savings (vacations, next car, Christmas gifts, etc.)
15%: Long-term Investments (retirement accounts)
10% FUN
Have some fun without the guilt since you’re taking care of a broad array of needs and important goals.
Good luck this year!

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