Making the Most of Your Tax Refund

Tax refund can be a nice reprieve after going through the tedious task of doing your taxes. If you have a refund, how can you make the most of that refund? What are some financially strategic moves you can make? Sam Taube, NerdWallet Investing Spokesperson and Writer joins Cassidy Clement to discuss.

Summary – Cents of Security Podcasts Ep. 97

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement 

Welcome back to the Cents of Security Podcast. I’m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers, and today I’m your host for the podcast. Our guest is Sam Taub, investing spokesperson and writer at NerdWallet. I—tax refunds can be a nice reprieve after going through the tedious task of doing your taxes every year. 

If you have a refund, how exactly can you make the most of that? And what are some financially strategic moves that you can make? Welcome to the program, Sam. 

Sam Taube 

Thanks for having me on. 

Cassidy Clement 

Yeah, so since it’s your first episode, why don’t you tell our listeners a little bit about your background in the industry? 

Sam Taube 

So I have been a financial journalist for most of the last decade. I’m currently the lead investing writer and spokesperson for NerdWallet, and I also write our email newsletter, The Nerdy Investor. I— 

Cassidy Clement 

Awesome. So when we’re talking about today’s magic topic of tax refunds, most people—at least when we’re recording this—have met tax deadline: yesterday, April 15th, the magic day, right? I— 

Sam Taube 

Hopefully. 

Cassidy Clement 

Yeah, hopefully. There’s a lot of things that go into that—hope and prayers and dreams that maybe you get a refund or that at least you were budgeting the right amount. 

But most people are familiar with the phrasing, “Okay, tax season or tax refunds.” But when it comes down to it, does it usually range on how you file and how much you make? Or is it more predictable for most? 

Sam Taube 

There are a lot of variables that affect the size of your refund or the size of your bill. One of the biggest is just the nature of your income. Salaried employees—people who are W2 workers—generally have income taxes automatically withheld from their paychecks, as do people receiving unemployment payments. 

And in those cases—in many of those cases—just filing your taxes is often enough to entitle you to a refund. Different if you’re a small business owner or a 1099 worker, like an independent contractor. Those people don’t necessarily get automatic withholding, and they often need to pay estimated taxes quarterly in order to be eligible for a refund at tax time. If they don’t, they often end up with a really big bill. 

Then retirees can go either way. Retirees who are withdrawing from a traditional 401(k) or IRA, or those who have not opted for taxes to be withheld from their Social Security checks—they’re generally in the bucket where they need to pay in advance if they want to get a refund at tax time. 

Cassidy Clement 

There’s a lot of elements there that you mentioned. Are there some other things that maybe were more along the lines of, like, some credits or deductions? I know you mentioned a lot about status. 

Sam Taube 

Certainly, deductions also play a really big role. Now, most taxpayers don’t have enough itemized deductions to make itemizing worthwhile—which means that they’re generally best off taking the standard deduction. But the standard deduction varies in size based on your filing status—single versus married filing jointly, versus head of household, etc. 

So that is another major variable that affects the size of your refund or bill. 

Cassidy Clement 

So when we’re going to utilize tax refunds, most people are gonna say it depends on the size, right? But let’s say you get a substantial one. Maybe it’s your first year outta school and you got a full-time job—which was maybe a very different level of full-time income compared to maybe a part-time job during schooling. 

What are some ways that you can utilize a tax refund to move towards more positive financial goals? Maybe it’s retirement funds or paying off loans, things of that nature? 

Sam Taube 

Before I answer that, I should just say that I’m not speaking as a financial advisor here. And if you’re unsure about the best way to utilize something like a tax refund, talking to a financial advisor can be one place to start. And if you don’t have one, there are a number of kind of online shopping tools—and NerdWallet is one of them—that can help you get connected with a financial advisor. 

Now, having gotten that little disclaimer outta the way—at the moment, a lot of people are looking for ways to increase the resiliency of their personal finances amid the uncertainty we’ve been going through the last couple months. Advisors say that two of the most important things you can do to prepare for a period of economic volatility or a potential recession are to build up an emergency fund with three to six months of living expenses and also to pay down high-interest debts, such as credit cards. 

We’re talking about debts here whose APR is much higher than you’d reasonably be able to earn in the stock market under normal circumstances. Those are definitely two things that I think a lot of people are thinking about right now as we watch the stock market whipsaw, and we wonder what’s next for the economy. 

Cassidy Clement 

Yeah, the three words that stand out to me there are resiliency, uncertainty, and volatility. It’s like in the times of uncertainty and volatility, people would like to see some type of retention within their money or their cash flow that shows a resiliency over time—especially when you’re just starting out or you’re looking to have a larger purchase. 

But let’s say that you decide, “Okay, I would like to incorporate some of this refund into a financial strategy.” What are some things to keep in mind? Initially, you might think you’re never guaranteed to get back what you put in—or even more—you may lose it all. But what are some other things to keep in mind? 

Sam Taube 

I think when it comes to the idea of investing a refund, one thing to keep in mind is that the timing of refunds isn’t always perfectly predictable. 

On a similar note, if you’re planning to invest your refund, it’s worth keeping in mind that it would likely be a lump-sum investment, which is a little different than the small recurring contributions a lot of people make to their retirement accounts. Now, this isn’t a good or bad thing necessarily. Investing a large lump sum can be quite profitable if you happen to do it at the bottom of a bear market or in the early stages of a bull market—but it’s almost impossible to identify those things in advance. 

If the market takes a turn for the worse after you invest a lump sum, that can hurt. But one way to mitigate that risk is to initially put your refund in just a savings or checking account and transfer small recurring amounts of it into your investments over time. That kind of allows you to take advantage of the same kind of dollar-cost averaging effect that people get when they contribute to a 401(k) with their paycheck. 

Cassidy Clement 

Yeah, and I think a lot of people will—you were talking about whipsaws earlier—start to look at their refund and say, “Wait a second, maybe I should really take a beat and think about where I’m gonna put this now.” Because we’ve seen some pretty high volatility when we’re actually settling down a little bit—if that’s even possible. 

If that does happen—no one knows the future—but when the year moves on and we start to see or get an idea of the income that we’re going to make, or the potential income that may be on the horizon, what are some things to keep in mind for the upcoming tax year that may potentially yield a higher tax refund? There’s many different things that come into consideration, like deductions, status, and what goes towards retirement or HSAs, or timing for your mortgage. What are some things that people should keep in mind from more of the expert perspective and research that you’ve found? 

Sam Taube 

As you mentioned—401(k)s, IRAs, and Health Savings Accounts—tax-advantaged investment accounts of various kinds are a great way to reduce your bill for the upcoming tax year. And it’s worth mentioning—we’re a little too late for this for the 2024 tax year—but you actually have until tax day to make contributions to those sorts of accounts. 

So, for example, if it’s the end of 2025 and you’re looking for ways to reduce your tax bill come April, you can generally still make contributions to those sorts of accounts up to tax day in April 2026. Those sorts of accounts, because they allow contributions to be deducted from your taxes, can definitely be a good resource. 

If you’re investing in a taxable brokerage account, it might be worth learning a bit about tax-loss harvesting. This is a technique where some investors will strategically sell investments that have a negative return so that they can claim those losses and use them to cancel out taxable capital gains. 

You can do this with up to $3,000 worth of losses per year, and if you have more losses than that, you can carry them over to cancel out gains in future years. And finally, another thing that might be worth considering to folks who have a lot of money in taxable brokerage accounts and are wondering how to lower their tax liability is looking into some tax-exempt fixed income investments. 

In the most recent issue of NerdWallet’s Investing newsletter, we gave an overview of some tax-exempt bond investments like municipal bonds and municipal bond funds that promise federal and sometimes also state and AMT tax exemptions. There are a number of options out there that can allow you to earn a return in a way that is not taxable. 

Cassidy Clement 

You mentioned tax-loss harvesting, which was great. We actually have an upcoming podcast on that, and you’re right—it’s definitely intricate and it does take a very keen eye to know if the situation is right for yourself. 

But one other part that I wanted to ask you about before we wrap up is the element of new credits or new tax credits that may apply to new elements of your life. Are there certain things that come to mind for you or that you think about or write about that people may not initially think of? 

I guess a quick one that comes to mind is dependents. Sometimes people forget about that in the sense of maybe they had a major life change or maybe they had an income change within the year. 

Sam Taube 

Dependents are definitely a major tax break for many people. That’s something—one more time—dependents are a pretty big tax break for many people, and making sure that you have your paperwork in order to properly claim any dependent-related credits that you’re entitled to, that’s another thing that is worth talking to a financial advisor about if you’re not sure how to get those things in order. 

Another tax credit that I think is worth mentioning—we talked earlier about how small business owners and independent contractors often have a very different tax situation than salaried employees—a tax credit worth considering if you’re in that situation is the tax credit for obtaining health insurance coverage through a health insurance marketplace. 

I believe the form for that is called 1095-C, and I can personally say from years when I’ve worked as a freelance journalist, that one can make a really big difference. So make sure that all that information is entered correctly in your tax return. 

Cassidy Clement 

Yeah, there’s definitely a lot of elements that are associated with what you do for a living, how you file, how many people are in your household—if you want to call it that. I remember in the years I was in school, in college, getting a form for my tuition that I would reference on my taxes. That would help, I hope, offset some things when it came to what I would owe. 

But you brought up some awesome points today, Sam. Thanks for joining us. 

Sam Taube 

Of course. Thanks for having me on. 

Cassidy Clement 

Sure. So as always, listeners can learn more about an array of financial topics for free at interactivebrokers.com/campus. Follow us on your favorite podcast network and feel free to leave us a rating or review. 

Thanks for listening, everyone.