What is a tax refund?
First, a definition: A tax refund is a reimbursement from the IRS if you paid too much in taxes throughout the year. This can happen when you withhold too much in taxes from your paycheck. (If you’re considered an employee, you can find withholdings on your pay slips or on Form W-2.) When you file an annual tax return, you have a chance to ask for that money back.
Keep in mind that not every filer is entitled to a tax refund. In fact, in tax year 2024, just over 35% of taxpayers didn’t receive one.1 But if you do get some dough back, your tax refund might be a nice chunk of change. The IRS reported that the average refund in 2024 was around $3,138.
That much could be a game-changer—if you use it well. Here are 8 smart ideas for what to do with your tax refund.
1. Save for emergencies
Emergency savings could help you handle an unexpected bill without having to rely on credit cards. Having emergency savings is especially important today: A January 2024 Bankrate survey found that 59% of American adults couldn’t afford to pay a $1,000 emergency expense from their savings. That could mean taking on high-interest debt if you were to get hit with a surprise charge, which would make it harder for you to save in the future.
Fidelity suggests having at least $1,000 on hand as a cash buffer. Eventually, you’ll want 3 to 6 months’ worth of essential expenses (think: food, utilities, housing) in your emergency stash.
2. Save more for retirement
Consider using any windfall to build up retirement savings. That’s because investing your money over the long term in a tax-advantaged account could help your dollars go further, thanks to the potential of compounding (or when the returns on your money start making money). If you’re not already contributing enough to a 401(k) or 403(b) workplace retirement plan to capture the maximum match your employer offers, you could start there. You could also consider contributing to a traditional IRA or a Roth IRA with your tax refund.
3. Pay off high-interest debt
About 81% of Gen Zers in large metro areas have credit card debt, and nearly 60% of millennials have auto debt.4 Assuming you have already met your employer match, you can use your tax refund to pay down credit card debt first. Then, if you have any other debt with an interest rate of 6% or higher, move on to that. That head start could help you chip away at debt faster instead of letting it snowball. Even if your refund doesn’t pay off all your debt, tackling any size chunk could make it easier to ultimately finish paying it off.
4. Splurge responsibly
It’s OK to treat yourself with a portion of your tax refund—just do it mindfully. For example, you might choose to spend 10% of your refund on something fun, then save the rest. Bonus: That small instant gratification could actually improve your finances over the long run. Research shows rewarding yourself for making smart money moves could keep you motivated to keep going.
5. Stash it away to pay taxes next year
Especially if you’re self-employed or your salary varies from year to year, it could be wise to save this year’s excess for a possible tax bill next year. Owing taxes and being unable to pay could lead to costly penalties, so it’s better to be overprepared. Plus, if you end up not needing the extra cash next year, all you did was save money—which isn’t a bad thing.
Pro tip: You could potentially grow your refund by stashing it in a high yield savings account or a short term CD.
6. Invest in yourself
Think of this as treating your future self. Is there a certification that could help bump up your pay at work? A course that could open up new opportunities? Could talking to a career coach give you some direction? Consider using your refund to turbo-charge your career. If you don’t know where to start, ask a more-senior colleague what skill or experience they think has been valuable to them. Then, look around for a course, certification, or advisor that could help you become more marketable.
7. Upgrade your tools
If your job requires you to own your own tools, consider funding an upgrade with your refund. Whether it’s a drill with more torque, a faster laptop, or a premium software subscription, your refund could boost your productivity. And time is money. Plus, items you buy for work may be tax-deductible, potentially raising your refund next year. Just keep those receipts.
8. Start saving for the holidays
Sorry to give you chills in spring, but holiday gifts are getting more expensive. After record spending intentions for the 2023 holiday season, American shoppers planned to spend even more in 2024—nearly $1,780, or an increase of 8% year over year.6 Even though winter may feel like a long way away from tax season, consider saving your refund now to cover gift-giving later.
Happy tax filing!
