Advertisement
Taxes

What to Do With a Tax Refund

Got the basics covered? We have plenty of other ideas.

It’s rare to get a windfall these days. That may be one reason so many people have so much more money than necessary withheld from their paycheck for taxes. The average refund has been around $3,000 for the past two years (most people receive their refund within three weeks of filing their returns). We usually counsel against giving Uncle Sam an interest-free loan, but if you have a refund check coming your way, consider using it to bolster your personal balance sheet.

Advertisement - Article continues below

You could use the extra cash to make a dent in debt—for example, to reduce high-interest credit card debt or pay down the principal on your mortgage. Or you could beef up your long-term savings—say, by adding to your retirement savings in an IRA, or by helping your kids or grandkids save for college in a 529 account. You could rebuild your emergency fund or start saving for a down payment on your next home.

Already have those basics covered? We have some other ideas:

Prepay your vacation. Set aside some money for a vacation ahead of time. That will ensure you pay off your credit card balance after you return and don’t accrue interest charges. Stash your refund in a separate account, then add money automatically every week (it’s easy to set up an online account for one of the money market deposit accounts listed in Cards You Can Count on Overseas; you’ll earn a bit of interest, too). You could also set up the account for other expenses—such as a new car or holiday gifts.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

Invest in your home. Your refund won’t be enough to redo your kitchen or bathroom, but it can pay for some smaller home improvements. Use the extra cash to add a backsplash, paint a room or cabinets, replace your bathroom sink, swap out your faucets, organize a closet, buy some shrubs or install a programmable thermostat (see 50 Top Money Tips).

Load up on stocks. Use the extra cash to buy shares in a mutual fund or stock you’ve been considering, but may feel is too risky for your IRA or not available in your 401(k) plan. For example, if you want to invest in small-company stocks vetted by a pro, check out a new addition to the Kiplinger 25, Homestead Small-Company Stock fund, which has a $500 minimum investment. For individual stocks, consult our “Stock Watch” columns, including 16 Stock Picks for Risk-Averse Investors and 6 Tech Stocks for Dividends.

If your refund this year was substantial, consider giving yourself an immediate raise by adjusting your tax withholding to increase your take-home pay. Use our tax-withholding calculator to figure out how many allowances you should claim. (You’ll need to refer to your 2011 tax return.) Then ask your employer to give you a new Form W-4 to fill out.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for IRA or HSA contributions, paying estimated taxes and other deadlines, there's more to do by July 15 than just filing your federa…
July 10, 2020
Know Why Your Credit Score Changes: 9 Money Moves to Consider
credit & debt

Know Why Your Credit Score Changes: 9 Money Moves to Consider

Your credit score is a key indicator of your financial well-being and of the risk you pose to lenders. How good is yours?
July 10, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020

Recommended

Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
July 9, 2020
8 Ways You Might Be Cheating on Your Taxes
taxes

8 Ways You Might Be Cheating on Your Taxes

Don't fall into these common traps that can get you in hot water with the IRS.
July 8, 2020
2020 Tax Deadline: When Are Tax Returns Due This Year?
tax deadline

2020 Tax Deadline: When Are Tax Returns Due This Year?

The April 15 deadline for filing your 2019 federal income tax return (and paying taxes) has been moved back...but the new due date is approaching fast…
July 8, 2020
How to Get an Extension for Filing Your Tax Return
tax deadline

How to Get an Extension for Filing Your Tax Return

If you can't wrap up your tax return by the July 15 deadline, it's easy to buy yourself more time.
July 7, 2020