How to Think Strategically about Your Tax Refund—Or Help Someone Else Do the Same

Tax season: Isn’t it just your favorite time of the year? For millions of Americans, the drudgery of preparing and filing a tax return is offset somewhat by the anticipation of receiving a refund from Uncle Sam. In fact, according to the IRS, some 9 million refund checks totaling a whopping $20 billion had already been sent out as of mid-February.

But even if you’re not among those who typically count on getting money back from the US Treasury, chances are you know someone who is. And, especially for family stewards, that person might actually be looking to you for advice about the best use of that annual “windfall” from the federal government. So, we are presenting here—in order of preference—what we consider the best uses of your (or somebody else’s) tax refund, 2022 edition.

  1. Pay off debt. As fiduciary advisors, we say it all the time: debt is not your friend, because it limits your options. Especially for younger persons, who are more likely to be carrying too much high-interest debt in the form of credit card balances or personal loans, shedding debt is one of the most important steps toward financial security. Whether using a cascading payoff plan or some other method, persons with debt who receive a refund check will typically do themselves the biggest favor by using the funds to cancel as much debt as possible. After all, getting rid of a credit card balance that is costing you double-digit interest boosts your bottom line in the same was as getting a double-digit return on an investment.
  2. Build savings/emergency funds. Nothing knocks a financial plan off-track quicker than an unexpected car repair bill, failure of a major appliance, or even an employment setback. The #1 defense against the unexpected is a solid “rainy day fund” that can be used to deal with those inevitable, out-of-nowhere potholes in the road of life. The rule of thumb is that you should aim to have three to six months’ worth of income in your emergency fund, which needs to be earning interest at a competitive rate, but also readily available for—well, emergencies. That IRS refund check could go a long way toward giving you the peace of mind that comes with having something set aside, “just in case.”
  3. Fund your IRA or other retirement plan. One of the principal keys to building wealth is getting your money to work for you, rather than you working for your money. And there is no better method for keeping your money profitably employed than consistently funding an IRA or other tax-advantaged retirement plan. Not only do you get the magic of compounding and growth over time, but the funds in the plan are undisturbed by taxes. Especially for younger individuals, who have the huge advantage of time before retirement, systematic contributions to a retirement plan provide powerful leverage toward achieving not only a stress-free retirement but also, thanks to recent changes in tax law, potential education funding for a child or even a down payment of as much as $10,000 on a first home.
  4. Home improvement. If your debt is under control, your emergency fund is healthy, and your retirement accounts are fully funded, you might consider using that tax refund to improve the value of another major asset: your home. For those who own their homes, it can make sense to remodel or refurbish, especially when doing so increases the market value—and thus, the owner’s equity. And if Uncle Sam is footing the bill for that kitchen update or new master bath, so much the better!

At Empyrion Wealth Management, we work closely with family stewards and others who want to make smart financial decisions for themselves and for others. To learn more, click here to read our whitepaper, “Family Stewards.”

Stay Diversified, Stay YOUR Course!