How to use your tax refund for financial freedom

April 11, 2023

The "secret" to financial freedom is consistently using your money to buy back your time.

Yes, save a portion of every paycheck, but ALSO save a portion of your money every time you receive one-off payments.

Like your tax refund

In today's newsletter we're tackling:

  • What should I do with my tax refund?
  • Should I adjust my withholdings to have a lower tax refund?
  • How can I save on taxes this year?

What to do with a tax refund:

My first job was working at a shoe store in the mall, and I remember my first time working the April/May months. We would hit RECORD sales.

Shoes were flying off the shelfs, I hit all of my daily and weekly sales targets for shoes & socks by Monday (yes I had to hit sales goals and no, I was not compensated more for hitting them).

Turns out it was not my impressive saleswomanship finally coming out. It was tax refund time.

I know this because around June things were back to normal.

People plan large purchases around their tax refund all the time:

  • Peloton bikes
  • Vacations
  • New TVs

Or they’re using it to pay off their credit cards because they already purchased the thing they were excited for.

My opinion is that you should use some of your refund on present day you.

As a recovering over-saver, I consistently remind myself that it's all about balance.

But self-care is taking care of present day you AND future you.

So, like a lot of things in personal finance, using percentages can be your solution here:

  • 50% to savings.
  • 25% to spend today.
  • 15% to bills.
  • 10% to vacation savings.

Remember money is a tool.

And if you’re unhappy in your 9-5 or you just want more security, you can use money to accomplish this.

Use money to start building your dream life:

  • Send money to your emergency fund.
  • Send money to your freedom fund.
  • Fund your Roth IRA.
  • Pay off your credit card debt.​

Adjusting your tax withholdings:

Now I know not all of us get tax refunds. Some of us owe tax instead (looking at myself here).

There are people out there who view refunds as a bad thing: “you just gave the government an interest-free loan!"

So what should you do if you’re unhappy with the size of your refund and you think it should be smaller?

Well for one, if you’re going to adjust your withholdings so you can invest more throughout the year, you need to be disciplined here.

For the vast majority of us we aren’t going to notice that extra $27.64 (example) every paycheck. Let alone invest in.

If you still want to adjust your withholdings, you can contact your employer to update them.

Saving on taxes.

I could write a 1,000 page book on this topic and it still wouldn't be enough.

But let's cover the important things to know here, so you can go to your accountant and see if it's an option for you.

For both employed and self-employed, retirement accounts are a great way to reduce taxable income:

  • Traditional 401(k) or 403(b)
  • IRA
  • HSA
  • Solo 401(k)
  • SEP IRA

For my business owners, you could potentially put away a LOT of money in a Solo 401(k) or SEP IRA. This is one of the first things I look into when my business owner clients have a large tax bill.

Itemize deductions.

This gets a bit more complicated and takes a lot of planning to create a year where you can itemize deductions rather than take the standard deduction.

Use a great financial planner and CPA to see if this is possible for you.

Real estate.

Real estate is extremely popular for high earners to use to reduce taxes.

Just remember, most of the time, real estate is another job rather than a way to passively build wealth and reduce taxes.

Before you take it on, do your research.

Business expenses.

Running a business gives you access to a lot of potential tax savings.

I could list countless write-offs here but my tip is to find a qualified CPA to help you understand the tax code and keep very detailed records.