Blog | Personal Finance

3 Steps to Maximizing Your Tax Return

Beginning to think about taxes like the rich

It's that time of year again where people celebrate the fact that they're getting money back from the government in the form of a tax return. Of course, it's money the government used interest free and money you couldn't use for a year, but money you get back nonetheless.

Putting aside the fact that a tax return is less something to celebrate and more something to avoid through smart tax planning and prep, the reality is there will be many people who receive one this year.

So, what do you do with that minor windfall?

If you're like most people, you spend it on liabilities like a vacation or a new car. Or perhaps you use it to pay down some debt from the liabilities you've already purchased. But there are better, smarter ways to use you tax return.

The following is a three-step, financially-intelligent way to maximize your tax return this year.

Start a investment fund

If people aren't paying off their debt or buying some new knickknack, the conventional wisdom is to put your tax return into savings. Honestly, this isn't much better than simply not having the money on hand in the first place. Instead of the government saving the money for you, you put it into an account that makes next to nothing in interest. The only difference is you can now be more tempted to spend it.

I've written before about how Kim and I consider investing an expense. Each month we put money aside, budgeted in our expense column, to save not for saving's sake, but in order to invest that money.

A tax return is the perfect time to seed-fund your investment account. Spend some time deciding what you want to invest in: paper assets, real estate, commodities, or business, and use your tax return as the initial funding for that investment activity.

Start a side business

In addition to setting aside your money for investing, consult an attorney and set up a proper legal entity to run your investments and business through, even if it's on the side.

By setting up a side entity, you can realize significant tax benefits by writing off your expenses for the business. This means that if, for instance, you want to get into real estate investing, you can write off all expenses related to that activity-including travel, education, and more.

This is a key step. Because if you simply record all your finances as personal earned income, you have very little recourse to tax savings. All the tax laws are written to encourage investing and business, so the real tax benefits go to those who practice in those areas.

If you liked your tax return this year, you won't believe how good it feels to keep even more money on hand through the smart management of your money via a legal entity like an LLC or S-Corp.

Hire a CPA

Finally, as much as you'd think it would be easy to invest money, start a business legally, and save money in taxes, it's not always clear-cut. Ultimately, you should have your financial planning set so that you won't even have a tax return because you have your money on hand rather than sending it to the government to hold onto for a year or more.

But in order to plan well, you need the help of an expert. A good CPA will be able to sit down and help you plan out the best way to maximize your investment fund and take advantage of your legal business entity.

All of these things take relatively little money to start up, and most tax returns can cover a majority, if not all, the costs.

So this tax season, make a true investment in your future by putting that tax return to work for you in a way that will pay big dividends down the road.