tax return

Many taxpayers will be receiving a potentially large tax refund after overwithholding their 2014 taxes. While it’s never a good idea to make an interest-free loan to the government, it is sometimes hard to avoid overpaying. If you find yourself with a sudden infusion of cash from your return, here are some smart ways to get the most bang from these bucks.

  1. Making gifts to qualified charities is a great use for any refund. Doing so will generate tax deductions that can help reduce your 2015 tax burden.

  2. Do you have any IRA accounts? If not, you may have a Roth IRA funding opportunity. The following concept works best if you have no money in IRA balances, so it’s important to work closely on this with your financial planner and tax advisor.

    IRAs and Roth IRAs permit contributions of up to $5,500 per year (with a $1,000 additional “catch-up” contribution if you are over 50). IRAs may be funded with pre-tax or after-tax contributions. Roth IRAs are only funded with after-tax contributions. Once you reach certain modified adjusted gross income thresholds only after-tax contributions are permitted for IRAs and you are not permitted to contribute directly to a Roth IRA.

    Ideally you would want to contribute a portion of your refund to a Roth IRA. However, if you are unable to do so because your income is too high, you could fully fund your IRA with after-tax contributions and then convert those contributions to a Roth IRA. Over a 20 year period of time, you could fund over $100,000 into a Roth IRA via this conversion technique, all with after-tax dollars growing tax-free and distributing tax-free. You can fund your 2014 IRA or Roth IRA until April 15, 2015, so if your refund is in excess of $5,500 (or $6,500 for those over 50) you could also contribute to your 2015 IRA.

  1. If you have children or grandchildren, some of the refund could be used to fund college education plans. For children, contributing to a separately managed fixed income account is an easy solution. For grandchildren, a traditional approach is to fund a 529 Plan where you can gift up to $14,000 per child (or $28,000 per child for married couples) per year.

  2. If you have an estate plan in place that includes an Irrevocable Life Insurance Trust (ILIT), consider earmarking your refund for your annual premium gifting. This is also a good time to review whether the policy is performing as promised, whether the trustee is performing his or her duties according to law, and whether you still need the policy.

  3. You could allocate a portion of the refund to your overall investment portfolio.

  4. Lastly, consider using some or all of the refund towards paying down debt (e.g., high interest credit cards, mortgages or home equity lines of credit).

Your advisor at City National will happy to assist you in designing a well-conceived strategy regarding the allocation of your tax refund. Please contact us at (310) 888-6343 for more information.

City National Bank, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person of any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.