In 2023, the average tax refund was $3,167 according to the Internal Revenue Service. That may seem to be a windfall that pushes you toward an impulse purchase such as a new car, new entertainment center, or a weekend getaway. While those are all tempting, consider these options that will benefit you better in the long run.
Save for emergencies.
More than 60 percent of Americans are not prepared for unexpected expenses. It is important to have a savings account that serves as an “emergency fund” with a balance that could cover three-to-six months of living expenses in case of sudden financial hardships like losing your job.
Pay off debt.
Pay down existing balances by chipping away at loans with the highest interest rates first.
Save for retirement, your child’s education, or future health expenses.
Open or increase contributions to a tax-deferred savings plan like a 401(k) or an IRA. Your bank can help set up an IRA, while a 401(k) is employer-sponsored. Look into opening a tax-advantaged 529 education savings plan to ensure school expenses will be covered when your child reaches college age. Or save for future health expenses with tax-free dollars by investing in a Health Savings Account.
Pay down your mortgage or student loans.
Make an extra payment on your mortgage or student loans each year to save money on interest while reducing the term of your loans. Be sure to inform your lender that your extra payments should be applied to principal, not interest.
Invest safely with U.S. savings bonds or municipal bonds.
The U.S. Treasury allows for savings bonds to be purchased using your tax refund for as little as $50. Savings bonds earn interest for a maximum of 30 years. To purchase or for more information, click here.
Invest in your current home.
Use your refund to invest in home improvements that will pay you back in the long run by increasing the value of your home. This can include small, cost-effective upgrades like energy-efficient appliances that will pay off in both the short and long term. If you have more substantial renovations in mind, your bank can help with a home equity line of credit.
Donate to charity.
The benefit is two-fold: Giving to charity will make a difference in your community, and you can also claim the tax deduction, if you itemize.
It is recommended that lower-income workers file a tax return—even if their income is too low to trigger any federal tax liability—in order to potentially claim the Earned Income Tax Credit (EITC). Depending on a recipient’s income, marital status, and number of children, the EITC can result in a refund of up to $7,430.