TABLE OF CONTENTS
When April 15 rolls around and you’ve filed your tax return, you’re likely in one of two camps: You’re paying the IRS or you’re getting a tax refund.
If you’re in the latter position, what should you do? Look no further when you’re searching for things to spend your tax return refund on.
When It’s Personal: Best Things to Do With Your Tax Refund
In this section we’re strictly talking personal, not business. Here are a few tax-refund spending options when your tax return scores you dollar signs.
1. Pay Off Debt
According to a CreditCards.com survey, 47% of Americans have credit card debt, and the pandemic has caused nearly one-quarter of Americans to add to their existing debt. That isn’t to mention student loan or medical debt. Cue bulging emoji eyes.
So, yes, when you’re asking yourself, “What’s the best way to invest my tax return refund?” Arguably one of the top answers is by reducing your debt load.
2. Bank It
In a COVID-19 world, financial expert Suze Orman recommends people make it a goal to save 12 months of essential living expenses (e.g., rent or mortgage, utilities, groceries, insurance) to put themselves in the best possible position should an emergency arise.
Another best way to invest your tax refund is to save for a large purchase. Are you looking to buy a house? Saving for a 10%-20% down payment is a worthwhile investment on likely your greatest asset. Consider a 20% down payment eliminates the added monthly cost of private mortgage insurance, which is required for a mortgage with less than 20% down.
You also might want to save for a new item, such as a car, furniture or vacation.
3. Maximize Your Retirement Account
If you file your tax return and find yourself with a refund, why not invest for your future. Dave Ramsey, a radio personality and author of several best-selling books about debt management and personal finance, recommends that after you’ve paid off all debt and saved up 3-6 months for emergency expenses, you invest 15% of your household income to fund retirement.
He suggests prioritizing investing in a match plan up to the maximum match amount, if your company offers one.
Then invest in a Roth plan, such as a Roth IRA or Roth 401K, which are accounts that grow tax-free, followed by other retirement plans until reaching the 15% mark.
4. Invest in Your Home
If you’ve been putting off a needed repair or just want to upgrade your abode, a tax refund could be just what you need to get started. According to financial advisory firm Betterment, homes provide their owners with an average rate of return of 8.6%-10% annually. Not too bad when you consider the average annual rate of return for 401(k) plans is 5%-8%.
When it comes to your home, here are some things to spend a tax return refund on:
- Make repairs
- Install new flooring
- Update lighting fixtures
- Replace old appliances
- Buy tools and repair equipment
- Improve outdoor area (e.g., pool, fencing, deck)
5. Spend a Little on Yourself
Adult responsibilities can be taxing (pun intended), and sometimes, you just need to do something to recharge yourself. Of course, that’s different for everyone, but here are a few that might resonate with you:
- Continue your education
- Hire a personal trainer
- Go on a semi-shopping spree
- Buy a long-awaited gift to self
- Pick up a new hobby you’ve been wanting to try
- Get pampered (e.g., massage, facial, full-day spa)
- Have a one-of-kind experience (e.g., skydiving, hot-air balloon ride, luxury car rental for a day)
6. Pay It Forward
If you’re in a solid financial position and don’t need the tax return money you receive, think about who you can help, even within your own community. Especially with the pandemic underway, many have lost their jobs, are behind on bills, don’t have enough food to feed their family and some are even homeless.
Whether giving to a neighbor down the street who has met with hard times or donating funds to a charitable organization, paying it forward is an honorable, worthwhile gesture.
Wise Ways to Spend a Business Tax Refund
If you’re getting a business tax refund, Cathedral Capital founder and president, Brooke Lively, suggests looking for a new accountant. Getting a business tax refund means you essentially gave the government a 0%-interest loan, she shares.
That said, if you happen to receive a business tax refund after filing your return, besides saving the funds, here are a few other ways you can use that money wisely.
1. Increase Your Marketing
John Ross, chief executive of Test Prep Insight, shares this advice: “I think the absolute best way to spend a business tax refund that will give you the biggest return on your money is doubling down on your marketing budget. The old adage ‘you need to spend money to make money’ couldn’t be truer.”
He goes on to say: “Marketing is the most effective way to grow your business. Return on advertising spend (ROAS) offers one of the strongest returns across all business department investments. Specifically, I would suggest spending a good portion of your business tax refund on Google Ads campaigns, as well as social media ads, assuming it makes sense for your industry.”
Ross also suggests allocating a portion of a business tax refund into hiring a digital marketing agency to improve your search engine optimization efforts and improve your Google ranking, which he asserts is the “quickest boost of traffic to your site and will absolutely help drive sales.”
2. Purchase Needed Machinery
Donna Tang, budgeting and finance expert at CreditDonkey offers this advice when it comes to investing in business equipment: “It’s important for any business or company to innovate from time to time.”
To foster innovation, Tang suggests investing your business tax refund into the company by buying or leasing new equipment or upgrading machinery.
She goes on to say, “Investing in such things can really help to boost your business’s productivity and sales. Even doing a basic upgrade, such as getting a new printer or purchasing a new project management software, can help to further streamline and automate the workflow.”
3. Invest in Your Team
Daniel Carter, founder of Zippy Electrics, suggests using a business tax refund to splurge on employees. “Giving your employees a bonus will boost their morale and naturally will increase their productivity,” he shares. Additionally, when employees are happy, loyalty increases and turnover is reduced.
Also, consider when extra funds could help onboard a much-needed, quality new hire. While your refund likely won’t equate to the salary of a full-time employee, think about part-time or contract positions that could have a positive impact on your bottom line.
For instance, could you benefit from hiring a contractor to improve your website? Could your content team benefit from a freelance writer? Could a part-time bookkeeper help keep your finances more organized?
4. Reduce Debt
It’s worth repeating, that a smart way to use a tax refund is to pay off debts.
If you’ve overpaid on your business taxes or have a refund, Jake Hill from DebtHammer, shares this advice: “Whether it’s paying off a business loan, reducing credit owed to suppliers or buying out early investors, you can put that money to good use.”
Find out what your debt is costing you and how best to make a dent in it.
5. Get Professional Development
If you have no business debt, Daniel Blue, owner of Quest Education, advises to invest money in yourself. He suggests entrepreneurs consider using their business tax refund to sign up for a high-level mastermind coaching program, developing business management skills while at the same time surrounding themselves with successful entrepreneurs.
“It will push you to grow. Get coaching from people better than you, and develop quality relationships that could turn into business for you,” says Blue.
Also consider investing in professional development for key team members. Look to online training programs and workshops from reputable industry organizations or postsecondary institutions.