A tax refund can be a sweet reward to working hard all year,
or so the IRS would like you to think.
The sad truth is that if you are receiving a large refund year
after year then you have been giving Uncle Sam a
Rather than continuing to do that, make sure to work with your
tax advisor on ways to avoid this "problem" in the future by
adjusting your withholdings and/or your estimated taxes.
There are a few different ways to calculate your withholding
and estimated tax requirements, so your tax advisor should be
able to tell you which method can help you to keep more of your
money throughout the year.
For example, if you are on payroll and also need to pay
quarterly estimated taxes, you may be able to avoid paying
estimated taxes if you can pay yourself a bonus or be able to
increase your W-2 withholdings in the last quarter of the
In an ideal world, you want to pay
just enough of what is required by the end of the year so
that you don't get hit with any penalties
The math is simple. For example, if you usually receive a
refund of $2,500 then you can divide that by 12.
($2500/12=$208) So generally, you would want to reduce the
amount of taxes you pay each month by this number. The IRS
website also has a withholding calculator that is easy
to use to calculate by how much to change your withholdings.
It would be much better to have an extra $200 a month vs.
getting it at the end of the year, right? If you do find yourself
with a large refund coming your way, then be sure to look at some
of the "good" and "not so good" ways to spend those tax refund
Let's look at some
ways you can spend your refund money.
Sometimes when people receive a lump sum of money, they end up
blowing it on things like shopping, expensive gifts, or buying
other luxury items that may not be needed. Sure, it feels good to
suddenly have a large sum of money, but don't start making
The Luxury Vacationer
If you didn't
to take this vacation, then don't spend all your tax refund
money on this without first thinking about your other financial
responsibilities for the year.
The Speedy Investor
Don't rush out and invest your money in the next get-rich-quick
deal that comes across your table. Even though your tax refund
may seem like an unexpected windfall, remember that it was your
money to begin with. Rather than pouring it into the first deal
you see, make sure that you think through the usual due diligence
and only invest if it's an asset that makes sense for you.
Mr. or Mrs. Lotto
Using your refund to stock up on lottery tickets is not a good
idea either. I know that as real estate investors we all love the
concept of "leverage" and some people may think that they can
leverage their refund in lotto tickets and make even more money.
But this carries huge risk and the outcome usually is zero return
Let's now look at
some positive ways
you can spend your tax refunds that can benefit your
Why not use your tax refunds to improve yourself, your
investments, or your business? Sign up for that class you have
always wanted to take or buy those business books you have been
wanting to read. Educating yourself to improve your real estate
business can produce great results for your investments. What's
better is that this can even be a great tax deduction for you the
The College Planner
If you have kids or grandkids, using your refund to start or fund
a 529 or an Education Savings Plan is a great idea. If you make a
habit of always using your refund to do this then before you know
it you could save a significant amount of money to fund your kids
or grandkids college years.
Think about using your tax refunds to fund a retirement account.
It is important to have some sort of a retirement account set up
even if you are under the age of 45. With this large sum of money
you can easily make a contribution to your future. The best part
of retirement funding is that you can actually use your tax
refunds to create more tax refunds for next year.
The Smart Banker
Instead of putting your money into your checking account, look at
paying down some of your debt with the highest interest rates.
After that, put some of the leftover money into your savings or
fund your emergency cash fund. You never know when emergencies
come up and you need to access that money so use your tax refunds
to prepare for those rainy days.
Make your money work for you and grow your investments. Many new
investors take advantage of refund time to invest in their very
first property. Seasoned investors can use a refund to make any
necessary repairs or routine maintenance on their investment
properties. Invest wisely to grow those tax saving dollars.
There are many more ideas for how you can use your tax refund
in positive ways. Think smarter and do not waste your money. Be
sure to speak with your advisor to see how you can change your
deductions and keep that extra money each month. If you do
receive a refund then think about what you can do with that money
to make a better future for you and your family.
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is Copyright 2014 BiggerPockets, Inc
Amanda Han of Keystone CPA is a tax strategist who
specializes in creating cutting-edge tax saving strategies for
real estate investors. As a real estate investor herself, Amanda
has an in-depth understanding of the various aspects of investing
including taxation, self-directed investing, entity structuring,
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