How to Double the Power of Your Tax Refund

Filing your taxes may be a dreaded chore. I personally would rather sleep on a bed of nails. But receiving your refund is, technically speaking, a wonderful reward (“technically speaking,” because remember: a tax refund is merely an overpayment of taxes in which you essentially loaned Uncle Sam money interest free for a period of time. A subject I should cover another time).

Besides buying my newest book, what you do with a refund is up to you, but here are some ideas that may make your tax refund twice as valuable.

Double your savings

Perhaps you’d like to use your tax refund to start an education fund for your children or grandchildren, contribute to a retirement savings account for yourself, or save for a rainy day. A financial concept known as the rule of 72 can give you a rough estimate of how long it might take to double what you initially save. Simply divide 72 by the annual rate you hope that your money will earn. For example, if you expect an average annual rate of return of 6%, your invested tax refund may double in approximately 12 years. Of course, this is a hypothetical estimate, and doesn’t account for taxes, inflation, or the actual return you may receive.

Split your refund in two

If you like to think of your tax refund as a welldeserved bonus, you may be less than enthusiastic about saving it or using it for something practical. If stashing it away in a savings account or using it to pay off bills sounds like no fun, go ahead and splurge on something for yourself. But remember, you don’t necessarily have to spend it all. Instead, why not make the most of your tax refund by putting half of it toward something practical and spending the other half on something more fun?

The IRS has even made it easy for you to do this. When you file your income taxes and choose direct deposit for your refund, the IRS allows you to have it deposited among two or even three accounts. Qualified accounts include savings and checking accounts, and other accounts such as IRAs, Coverdell education savings accounts, health savings accounts, Archer MSAs, and TreasuryDirect online accounts. To split your refund, you’ll need to fill out IRS Form 8888, Direct Deposit of Refund to More Than One Account, when you file your federal return.

Be twice as nice to others

Giving to charity has its own rewards, but Uncle Sam may reward you too by allowing you to deduct contributions made to a qualified charity from your taxes if you itemize. You can also help your favorite charity or nonprofit reap double rewards from your gift by finding out if it benefits from any matching gift programs. With a matching gift program, individuals, corporations, foundations, and employers offer to match gifts the charitable organization receives, usually dollar-for-dollar. Terms and conditions apply, so check with the charitable organization or with your employer’s human resources department to find out more about available matching gift programs.

Make your refund do double duty

A great way to increase the value of this year’s tax refund is to spend it on something that might offset your overall tax bill and potentially increase your tax refund next year. For example, this year you might want to consider spending your refund on improvements that will increase your home’s energy efficiency because you may be eligible for a tax credit worth up to 30% of what you spend (capped at $1,500 for certain improvements). Qualifying improvements include certain highefficiency heating and cooling systems, and water heaters, windows, doors, and insulation that meet strict energy-efficiency standards. You can find out more about this tax credit and other credits and deductions you may be entitled to by consulting IRS Publication 17, Your Federal Income Tax.