8 ways to spend your tax refund
Monday, March 24, 2025
By mid-March, the Internal Revenue Service had sent out almost $163 billion in tax refunds. The average refund amount was $3,271.
That's a nice chunk of change. Even if your refund isn't quite that large, or is more, when the money arrives comes the decision on how to use it.
Most people already have ideas of what to do with their cash back from Uncle Sam. Some have already put those plans into action.
But just in case you're unsure of how to spend your tax refund, here as eight suggestions. Some even have tax advantages.
1. Pay off your credit card debt. The interest on credit card balances is outrageous. Currently, the average credit card interest rate is almost 23 percent. If you’re a card holder who has an amount that’s just too big to pay off and have been watching it grow every month because of that interest, your tax refund could be the answer. Use that tax cash to finally erase that high-interest, constantly compounding debt or at least make a big dent in the balance.
Paying that revolving credit balance off, or at least substantially down, will give you more cashflow flexibility. It also will help your overall credit rating.
2. Open or add to an emergency savings account. Life just keeps happening, and sometimes it throws more than curve balls. A financial beanball, such as your car collapsing or a health scare, can totally wreck your finances. You can better deal with such calamities by keeping three to six months’ worth of your expenses in an emergency fund.
If you’ve had to tap the fund over the past few years, sorry. But now your tax refund can help you rebuild. And if you don’t have this backup savings, the tax money can get it going. Not only will the emergency fund help you through the next wild pitch life tosses your way, it will provide peace of mind knowing you’re equipped to deal with it.
3. Feather your nest egg. If you’re young, retirement seems soooo far away. Trust me. Time is sneaky, and persistent. It will catch up to you much more quickly than you think. You can be ready by saving for retirement now.
You can contribute up to $7,000 in 2025 to an individual retirement account, either a traditional version or a Roth IRA, which is the recommendation for younger savers. A Roth IRA doesn’t provide a potential immediate tax break like a traditional account, but Roth savings are tax-free upon withdrawal as long as you meet tax law mandated age (59½ years old), and holding period (had the Roth IRA for at least five years) requirements.
There are, however, some Roth income rules. You can contribute the full amount to a Roth IRA as long as your modified adjusted gross income (MAGI) is less than $150,000 if you’re single, or $236,000 if you’re married and filing jointly. If you make more than those filing status income amounts, you still might be able to make a partial Roth contribution.
4. Invest in non-retirement accounts. I know, the stock market is wild right now. But the recent drops have offered some buying opportunities. And, yes, there will be more dips. That’s just the nature of the beast. But owning equities for the long haul is a good way to diversify and build your wealth. Solid, well-researched long-term investments tend to outpace other safer savings methods.
You don’t have to invest in a risky asset. If you’re a do-it-yourselfer, mutual funds typically are a good choice. Or you might be more confident in your choice by discussing your goals and risk tolerance with an investment professional who can help you find the asset that fits your financial and emotional needs.
And you don’t have to invest a lot. But getting started is key. The longer your holdings have to grow, the better your chances for a positive return. And those stock market returns generally yield substantially more, again over the long term, than regular, lower-risk savings accounts, though it also involves more risk and volatility.
Investing also one of those areas that has tax advantages. In addition to looking for tax-smart assets to include your portfolio, when you do sell a long-term (that description again!) investment, which is one you hold for more than a year, your tax on the profit is 0, 15, or 20 percent capital gains rate, depending on your tax bracket. Those rates generally are lower than most individuals ordinary income tax rates, which range from 10 to 37 percent.
5. Save for more immediate goals. If you’re looking more at the here and now, use your refund to help you attain something you want now, or relatively soon. This could be a car (especially if you’re tired of your emergency funds going for repairs, a home (or a new/another one if your place is an upkeep nightmare), or even a special trip with your family.
In these cases, you don’t want your money in the more volatile stock market. Instead, consider lower-risk options, such as certificates of deposit (CDs) or money market accounts.
These saving vehicles’ higher interest rates and competition for customers has prompted some financial institutions to offer rates of 5 percent on one-year CDs. Rates on some money market funds, which are more accessible, are almost as high.
6. Improve yourself. Your New Year's resolutions are long broken, but your tax refund can give you a second shot at them.
Want to get in shape for the summer? Use your tax cash to join a gym. Want to learn another language? Take an in-person or online course. Knowing some key Italian phrases could come in handy when you reach your goal of saving enough money for the special family trip mentioned in tax refund spending suggestion #5.
Looking to boost your career? Take a work-related class. If it helps you maintain or improve your job skills, it could even provide you a tax break thanks to the Lifetime Learning tax credit.
7. Save for your child’s college costs. If the classrooms of most concern to you right now are those attended by your youngsters, put your refund to work here. One of the best options is a 529 plan.
These accounts get their name from the federal tax code section under which they were created. However, they are offered by states. That means there’s a potential federal and state tax benefits.
Generally, parents or other adults in a child’s life use 529 plans to save for the young person’s eventual college expenses. The contributions grow tax-free as long as they are used to pay qualified education expenses. Many states offer their own income tax deduction for contributions to these education accounts.
Even better, 529 money isn’t limited to college costs. You can use up to $10,000 per year to pay for K-12 tuition at private or religious schools.
8. Help others. Got everything you want? Good for you. Then consider using your tax refund to help folks who aren't so lucky or satisfied.
You can start with your family and friends. Gifts of cash or property are always welcome and it's so nice to hand out goodies when you're around to get the thanks. Plus, giving gifts generally have no tax implication for either the giver or the recipient. The key here is to stay under the annual gift exclusion amount, which is $19,000 for the 2025 tax year.
Or you can give to your favorite charity. Your tax refund donation would fall into the cash gift category. But if you want to do more, you have many philanthropic options. You can give goods, appreciated stock, vehicles, even some of your retirement savings as a Qualified Charitable Distribution (QCD) if you’re older.
If you do donate your tax refund (and more) to a qualified IRS charity, it could give you a tax deduction on the 2025 tax year return you file next year.
These are just a few ideas of how to spend your tax refund. You can mix and match these suggestions as you wish. Pay down some debt, save some, and enroll in a fun continuing education course. Or invest most of it, then go out to a fancy dinner with the rest.
It's your tax refund and your call. Enjoy!
You also might find these items of interest:
- Tracking down your federal tax refund
- TOP takes owed money off the top of tax refunds
- Some survivors wait more than a year to get deceased taxpayers' final refunds
- IRS seeking 1.1 million nonfilers who, in 2022, didn't claim a total of $1 billion tax refunds
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