The Smart Tax Professional: Advising Clients on How to Make the Most of Tax Refunds

The Smart Tax Professional: Advising Clients on How to Make the Most of Tax Refunds

Helping people invest in their futures by putting their federal tax return to work for them is one way for CPA, enrolled agents and other tax professionals to retrain clients and build a strong, competitive tax business. According the IRS, the average tax refund in 2010 was just over $3,000. That figure was up over 5% from 2009, due in large measure to a host of tax credits associated with he $800 billion government stimulus, and most people used their refunds to either pay down debt or to save.

What about this year? Well, let’s say that trend will taper off. The National Retail Federation recently surveyed 10,000 consumers and found that while the majority will still opt to save or lower debt with their refunds, the percentage of those choosing to spend their refund check this year surged 12.5%. A whopping 14% of Americans will invest their refund on a big-ticket item like plasma TBW, a luxury vacation or that insanely expensive sofa from Restoration Hardware. While these purchases may be cool, and are also a sure way to spruce up a home or give someone a much-needed and deserved break, there are better ways for people to spend their cash.

This is something that tax professionals like the CPA, the IRS enrolled agent and registered tax agent understand and encounter in their tax continuing education Tax CPE courses required for their professional certification typically cover top investment strategies for taxpayers, including how to leverage tax refunds as a way for building toward the future.

Below are seven suggestions in this respect that tax professionals should pass on to their clients when delivering the good news about an impending federal tax refund.

Financial Literary Training

These are financial courses — usually free or very low cost — that help can help taxpayers learn more about managing money, budgeting, checking and savings accounts, etc. Several courses are available, such as FDIC Money Smart, a financial education program through the federal government. Tax professionals looking to build a productive relationship with clients would be well served to encourage this important step.

High-Yielding Savings/Checking Accounts

Most financial organizations, such as banks or credit unions, offer savings or checking accounts. Encourage clients to place their new-found cash into a high-yielding savings/checking accounts where they can better interest, though this may sometimes require them to look beyond traditional brick and mortar institutions. Additionally, opening a savings or checking account allows other financial options? direct deposit and purchasing U.S. Series I savings bonds.

Individual Development Accounts

An IDA is a special savings account that has a matching funds aspect. Each time a person adds to the savings, they match the deposit.

Home Ownership Programs

The US Department of Housing and Urban Development has programs available for low- to moderate-income individuals and families to make affordable housing a reality. Coupled with the tax benefits of the first-time homebuyer credit, using a tax refund to purchase a home could be a home run.

US Savings Bonds

Buying a US savings bond can be a valuable asset building option. Starting a savings program can provide many benefits, such as saving for a down payment on a home, higher education or buying a reliable car.

Split Refunds

This option allows taxpayers to split a refund into as many as three accounts. For example, they could deposit a portion of the refund into a checking account, some into an IRA account, and then buy savings bonds with the remaining amount.


Tax professionals should consider encouraging taxpayers with refunds to explore the following investing opportunities:

Contribute to an IRA. If a taxpayer qualifies for a tax-deductible IRA, they have until April 15th to contribute and claim the contribution for your current tax return. Alternatively, they could opt to put the tax refund into an IRA for the following tax year.

Open a Roth IRA. Even though taxpayers cannot deduct the contribution from their taxes, the Roth IRA provides a tax-free way to save for retirement.

Contribute to a 529 Plan. Not only will taxpayers be investing in their children’s college future by doing this, but many states offer plans with tax advantages, such as upfront deduction for contributions and income exemption on withdrawals.

Purchase CD’s. This option will allow taxpayers to establish a CD ladder for continued returns.

As competition among tax professionals grows, advising taxpayers on how to wisely invest their tax returns will help set you apart from the pack.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.