Tax season is behind most Americans and many either have or soon will get a tax refund on their 2022 returns.
The average amount of those refunds are expected to be $2,933, according to the IRS, which is a significant sum of cash for most Americans.
The question for U.S. taxpayers getting a hefty tax refund is a simple one – what’s the best use of the money?
A recent CNBC study notes Americans, by and large, will either use their tax funds largesse to pay off debt or start a savings plan.
While either move makes good financial sense, everyone’s personal finance situation is unique, and there are many financially savvy ways to put tax refund cash to good use. The key is figuring out where the cash should be deployed.
“If you're getting a tax refund, you should carefully assess your financial situation before deciding what to do with the money,” said Leslie Tayne, founder and head attorney at Tayne Law Group.
It also helps to take a “big picture” view of your tax refund.
“There are lots of options,” said Robbin E. Caruso, partner, and co-lead of Prager Metis’ national tax controversy practice. “So start doing your research by discussing what makes the most sense for you with an experienced tax professional.”
Caruso also adds a word of caution.
Before you start spending your anticipated refund, keep in mind that if you owe back taxes to the IRS or a state, your refund will likely be applied or offset against your outstanding tax liabilities,” Caruso said.
Good Uses of a Tax Refund - Listed
Personal finance specialists list the most effective ways to leverage tax refunds in 2023. Here’s a snapshot.
Build or add to your household emergency fund. With layoffs rising and inflation still robust, put some of your tax money in a rainy-day fund.
“If someone doesn't have any emergency savings account then I would start there,” said. Caitlynn Eldridge, founder, and chief executive officer at the accounting firm Eldridge CPA LLC. “Considering a vast majority of Americans can't cover a $500 emergency then I would put money into a fund first.”
Don't just stick the cash in a standard savings account or you’ll miss out on free money.
“Open a high-yield savings account that pays you much more in interest than a traditional savings account so your tax refund dollars can grow effortlessly each month,” said Andrea Woroch, consumer finance specialist at AndreaWoroch.com.
For instance, Bread Savings high yield account offers a competitive 4.5% APY. “The cash is still easily accessible in case of emergencies but keeping it in a separate account ensures you don't get tempted to spend it,” Woroch said.
Pay down debt. While every situation is unique, one of the best ways Americans can use a tax refund is toward a debt repayment plan.
“The Federal Reserve found that at the end of 2022, Americans held $16.9 trillion in debt, an increase of nearly three percent from 2019,” said Larry Stephens, Regional President at Hancock Whitney Bank. “Even if a refund doesn’t cover the full debt balance, paying down a substantial part of the principal lessens the amount individuals will pay out of pocket each month toward the minimum balance.”
A lower household debt balance will save you money on interest charges.
“If you’re debt free, consider directing your refund to create or replenish your emergency savings,” Stephens said. “It’s vital to have access to liquid cash to cover the unexpected, and an emergency fund can help you avoid high-cost borrowing in times of uncertainty.
Contribute to a college fund. Parents of young children can also take the long view and use the money for college savings.
“For parents, a contribution toward a long-term goal (like higher education) and even better, to use a tax-advantaged savings/investment vehicle (like a 529 plan) to do so is a great idea,” says Patricia Roberts, chief operating officer at Gift of College, Inc. and author of “Route 529: A Parent's Guide to Saving for College and Career Training with 529 Plans”. “What’s great about 529 plans is that no tax is owed on earnings as the account grows in value and no tax is ever owed when funds are used to pay for a wide range of educational expenses.”
“Additionally, helping a child you love to avoid or minimize student loan debt will lead to less financial stress and more peace of mind in the long run,” Roberts added.
Invest in yourself. Your skills are your biggest asset and investing in either improving your current skill set or learning new ones could help you land a better-paying job in the future, Woroch said.
“You don't have to spend a lot traveling far to a conference either,” she noted. “There are plenty of ways to improve your skills online by joining a mastermind group, taking online classes, buying a course, buying books, joining a virtual conference or workshop.”
Use it towards a necessary purchase. If there's something you've been needing to replace or repair, your tax refund can come in wisely to avoid taking on more debt.
“Just make sure to shop savvy and make those tax refund dollars go further by comparing prices, looking at the open box or refurbished options from reputable retailers like eBay or Best Buy, using coupons through sites like www.CouponCabin.com where you can also earn cash-back that can help pay for another purchase,” Woroch added.
