Waiting for that big tax refund to hit your bank account? You aren’t alone. An estimated 74% of people received a tax refund in 2017 and, according to the IRS, those refunds averaged about $3,000 per filer.  Should you blow it or save it? What is the smart financial move for your maximum tax refund?

Tax refunds are reportedly down over $6 Billion dollars so far this year.  California Taxpayers are pissed and many blame Donald Trump and his new tax plan.  As a Los Angeles and Palm Springs financial advisor I offer my clients tax planning guidance to help them reach their financial goals as quickly and easily as possible.

Are you looking to put your tax refund to good use? Here are a few tips to maximize your tax refund, rather than just blowing it.

Let’s be honest. Getting a tax refund sure beats owing the government money.  You worked hard all year and saw taxes taken from each paycheck. You scoured your spending to find all your deductions to ensure the biggest tax refund possible. Because of that, you should be able to enjoy your surprise windfall, right?

Would you loan the government money for free?

Now before you run out and spend it all in one fell swoop, ask yourself why are you getting such a big tax refund each and every year? That large refund essentially means you gave the government an interest-free loan for the past year. I know people love receiving a nice big check at tax time. Might you enjoy having an extra $250 each month (on average) to spend throughout the year? If so, talk to your Human Resources manager and adjust your W-4 to get a little extra money each month. Your total tax bill will remain the same. The only difference is that you won’t get a big tax refund all at once.

What should you do with your maximum tax refund?

You filed your taxes and that big refund is coming your way. What now? For some of you reading this, that refund could be thousands of dollars. For others, it may only be a few hundred dollars but that is still better than owing.

Has credit card debt left you feeling stressed? Are you racking up interest on your credit card balances and tired of drowning under those sky-high interest rates? Use your tax refund as an opportunity to pay off a big chunk of your credit card debt. You may think that’s not as exciting as a cart full of stuff on Amazon, but it’s good for your finances.

If credit cards aren’t a problem, you can keep moving towards financial independence. Put that tax refund in your emergency fund or, if you don’t have one, start one. Strive to have three-to-six months saved, ideally somewhere it can grow, with the ability to access it when needed. These funds should only be used in emergencies like a job loss, car maintenance or illness. Booking a trip because you are stressed and need to relax is not a good enough reason to dip into your emergency fund

Extra Tax Refund Tip for HomeOwners

For all the homeowners reading this, you should plan on an even larger emergency fund. I’ve owned a home for more than a decade and something always needs to be fixed or replaced. Even the smallest job can be costly. It seems as if toilets always know it’s a holiday weekend or that guests will be coming. Double time is great for the plumber but terrible for your budget. My water heater knew I had a guest coming over for a holiday weekend.  Literally went out at 5.01 PM on Friday evening of Memorial Day.   I may or may not have showered at a friends pool party.

If that pesky credit card debt or emergency fund ate up your whole refund, think of how good financial security feels. Making smart financial choices now will make it easier to make other smart financial choices in the future. Think of how much easier it will be to save for a fabulous trip without all that credit card interest taking a chunk of your salary.

Beyond the Emergency Fund- with Maximum Tax Refund Tips

Congratulations if your emergency fund is on track. Use a portion of your refund for something fun if this is the case for you. Normally, I recommend using 10% of that refund on something nice for yourself like a massage or a weekend away.

Put the remaining money towards your serious and long-term goals. Increase your contributions to retirement accounts like a Roth IRA or your 401(k) at work. The money you put into that 401(k) may help you get an even bigger refund next year. Many people also use their refunds to make contributions to their children’s college savings account or to fund their Health Saving Accounts (HSA).

Beyond your 2020 Taxes

Congrats on finishing your taxes. You have finished them, right? Keep the momentum and keep moving on the path toward financial freedom.  Keep in mind the Trump Tax Plan is still in effect for 2021. Talk with your financial planner to see if you will be paying more or less going forward.  If they don’t offer tax planning help, it may be time to find a real financial planner, who can help you minimize your taxes.

Live for Today, Plan for Tomorrow.

DAVID RAE, CFP^®, AIF^® is a Los Angeles Financial Planner with DRM Wealth Management. He has been helping friends of the LGBT community reach their financial goals for over a decade. Nightline has called him a “Tax Wizard in an Expensive Suit” He is a regular contributor to the Advocate Magazine, Forbes.com, Investopedia and Huffington Post as well as the author of the Financial Planner Los Angeles Blog. Follow him on Facebook or via his website www.davidraefp.com

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