Tax Season Update - Strategies for Making the Most of Your Tax Refund

The Internal Revenue Service expects more than 146 million tax returns to be filed this year, with nearly three out of four taxpayers receiving a refund. That’s right – over 74 percent of Taxpayers may have overpaid the IRS in 2023.  Last year, the average tax refund was approximately $3,167.  While a tax refund may feel like “found money”, it's important to remember that it simply represents extra money that you withheld from your paycheck that may have been unnecessary.  Rather than spending a tax return on something frivolous, why not apply these funds toward improving your finances for 2024?

Pay down high-interest debt

According to, the average interest rate charged on credit cards is now 24.25 percent. Paying off debt that is charging interest is the equivalent of achieving that rate of return on your money.  For example, paying off a 24 percent credit card with your tax return is the equivalent of achieving a 24 percent return on those funds.  Keep in mind it is important to build sufficient cash reserves before sending your entire return to a creditor, as a lack of cash generally leads to incurring debt.

Consider paying down the highest-interest debt first while continuing to make minimum payments on any lower-interest debt you have. This may also help to reduce interest costs while expediting the payoff of debt in the future.  In some cases, a low interest balance transfer could be another option as well.

Build an emergency fund

Few Americans maintain sufficient emergency funds. Why?  Generally, inflation pressures and previous emergencies have sapped a large portion of savings, often resulting in reliance on debt.  According to the Federal Reserve Bank of New York, Americans now owe a staggering $1.13 trillion in credit card debt.

You may be familiar with the term “pay yourself first”.  Stashing away a portion of your tax return toward an emergency cash reserve is a great way to accomplish this. Maintaining at least 3-6 months of expenses in cash may provide the safety net necessary to help cover unforeseen expenses or a job loss.  Be sure to maintain FDIC coverage and consider looking at higher-interest online savings accounts.

Take advantage of tax-deferred retirement savings

What If there was a way to utilize this year’s tax return to reduce your tax liability for next year? Well, investing your tax return in a pre-tax Traditional IRA, 401(k), 403(b), 457 plan, and the like is a way to accomplish just that.  For 2024, taxpayers can save $7,000 in a traditional IRA ($8,000 if over age 50). Depending on income levels, you might also consider a combination of IRAs and employer-sponsored plans like 401(k)s.  The maximum 401(k) contribution for 2024 is $23,000 ($30,500 if over age 50).

In addition to pre-tax accounts, taxpayers in lower tax brackets may want to consider a Roth IRA or Roth 401(k). While a Roth does not provide an immediate tax deduction, it may provide tax-free growth when used appropriately.  Consult with your financial or tax adviser to determine whether a Roth or Traditional plan makes financial sense for you.

Fund a college savings plan

With over $1.77 trillion in student loan debt outstanding, earmarking a portion of your tax return toward your child’s future education expense may also be a great option. Consider assessing the benefits of a 529 plan as they can be one of the most tax-efficient ways to build funds for college. While savings used for qualified education expenses from a 529 plan grow federally tax-free, investment gains not used for qualified education expenses may be subjected to a 10 percent penalty tax.

Keep in mind that there is a new rule that may allow up to $35,000 of excess 529 contributions to be transferred to a Roth IRA for the beneficiary.  It is important to review the fine print as the 529 account must have been open for more than 15 years. The funds must be rolled over to a Roth IRA owned by the 529 account beneficiary and the rollover amount cannot exceed the annual IRA contribution limits.  Lump sum contributions from a tax return in combination with systematic monthly savings may help supercharge college savings for future expenses.

Adjust your withholdings

If you consistently receive excessively large tax returns, it may be time to speak to your tax professional about adjusting your withholdings – especially since interest rates have gone up. Remember, a large tax return is nothing more than an interest-free loan to the IRS that could have been applied to other goals.  For example, a $6,000 return could provide nearly $500/month of additional cash flow that could be working for you all year in cash reserves, education funds, or retirement accounts.  While increasing cash flow may be beneficial, withholding too little can result in owing the IRS, where penalties and interest could apply.  Consider speaking to your financial and tax advisers to determine which approaches are best for your unique circumstances.

Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNERtm  & Wealth Advisor.  He can be reached for questions at 732-280 7550, & LPL Financial Member FINRA/SIPC.