Being smart with tax refunds
It is that time of year.
You have either gotten your refund, or you are closely watching your bank account for it to deposit any day now.
Every year around this time, it seems like everyone is suddenly 'ballin' (sorry my teenager came out in me there.)
There are vacations being taken, eating out every night, buying new clothes, new cars, you name it, I have probably seen it.
Most people feel like they just won the lottery... and I am going to burst your bubble here possibly.
Let's take a look at what a tax refund actually is.
A refund is simply the IRS (or state) paying you back the money you let them borrow interest free all year long. It is not a big windfall, it is not free money, it is your money that you essentially gave to someone else to hold on to and they used it to earn money.
My theory on tax refunds differs from many mainly because I don't like refunds. A refund to me implies that I did a piss poor job of planning during the year and essentially lost money by doing so. What I mean by that is I could have taken that money and put it towards loans and saved money on interest or even invested it myself and earned money on my money. So by getting a refund I am actually losing money.
Now on the other side of that, some people like to have that large check as they use it for vacations or projects they have been planning on all year. To some, it is the easiest way to save large sums of money to be able to do things like that. And if that is you, that is fine, I just want you to be aware of what you are potentially losing by running your taxes this way.
Anyways, off my soap box and to the point of this.
I want to offer advice on some things you can do with your refund to use it to achieve your financial goals.
Invest. Take part of the money from your refund and put it into a retirement account. As a self-employed individual there are several retirement account options you can look at to see which is best for you, and they can even help reduce your tax bill. Talk to your accountant and financial advisor to see what options make the most sense for you.
Pay off debt. If you can use part of the refund money to pay off a credit card or a small loan payment, why not? How much cash each month does that free up for you? That cash can then be used to plan for vacations or to continue to invest and grow your net worth.
Invest in yourself. If you have been eyeballing a course or program that will help you generate more income, this might be the time to invest in it. You just received some bonus money (kinda...) and you will be using it for something that is potentially a tax write off as an entrepreneur.
Beyond that, I also recommend really considering if that refund is the best thing for your financial plan and goals. If you don't think it is, then you may want to look at adjusting your withholding if you have a W2 job in addition to your business. The IRS website has a tool just for this purpose. However, be aware that if your business grows, you may need to make estimated tax payments on a quarterly basis to avoid paying penalties for owing too much tax. And really, the best action you could take is to be working with your accountant more than just at tax time. A great small business accountant will work with you more on a quarterly basis (yes it is going to be a larger investment with them but well worth it in my opinon) to help you determine how much to pay for your tax payments as well as helping you identify areas where you may be able to use tax strategy and tax savings options to save even more. (My favorite is hiring my kids in my business!!!!)
Enjoy your refund in smart ways and you will thank yourself for it later.