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9 smart ways to spend your tax refund

How to spend the money mindfully

Receiving a large tax refund can feel like you won the lottery. For many of us, it’s the biggest paycheck we receive all year. That’s a lot of “extra” money at our disposal.

In fact, about 3 in 4 Americans receive a tax refund each year with the average federal tax refund being $3,200 in 2022. Residents in Wyoming get the biggest tax refunds, which average $5,027. The second- and third-place states come in at $4,461 (Connecticut) and $4,444 (New York).1

Keep in mind, however, that the money you got back was yours all along. You just gave Uncle Sam a year-long loan and he didn’t have to pay any interest on it. Not a bad deal for him.

While you shouldn’t necessarily aim to get a large tax refund every year, here are some ideas on how to use your windfall from Uncle Sam.

1. Pay off credit card debt

Life is expensive. And a lot of what we buy for ourselves and our loved ones goes on a credit card. Unfortunately, the average credit card interest rate is 19.28 percent.2

That’s why if you have credit card debt, consider using your tax refund to go toward paying that off first.

Do you have more than one credit card, or other bills with high-interest rates? Then consider paying off the bill with the highest interest rate first and the required minimum on the others.

Chances are your credit card bill is bigger than your tax refund — and you still have other bills with interest rates attached to them. If that’s the case, you might want to use the “snowball method” — which encourages paying off a bill with the lowest balance first — if you want to feel a greater sense of progress.

2. Add to your emergency fund

Life happens. And so do unexpected emergencies. The whole world experienced one in 2020, when COVID-19 caused great financial hardship for many people. In the autumn of 2021, some 63 million Americans (29 percent of the adult population) reported it was difficult to pay for household expenses such as food, rent/mortgage, car payments, medical expenses, and student loans.3 No doubt the effects of the pandemic played a pivotal role in these difficulties.

On the other hand, some people who had stable jobs during this time were able to build up their savings because they weren’t spending money on discretionary expenses, such as eating out, vacations, and other recreation.

If you are one of the lucky ones with a steady income, consider using the money from this year’s tax return to build up your emergency fund. For years, financial experts have recommended that people squirrel away three to six months of expenses in a money market or savings account for that rainy day — or year. Maybe this is finally your year to do so.

Don’t feel overwhelmed by this amount. Even if your emergency savings are close to zero, any amount you start with will help. Also, your tax refund could amount to a week’s — or even a month’s — worth of expenses. That’s a great foundation to build upon.

And you’ll feel more prepared when the unexpected happens.

3. Add it to your retirement savings, or jumpstart your retirement plan

Retirement might seem like a long way off. But don’t let that fool you into thinking it is. Are you on track with saving enough money for when that time comes?

A traditional or Roth IRA can help supplement your retirement savings. In 2023, if you’re under the age of 50, you may contribute up to $6,500. If you’re older than 50, that amount can increase to $7,500.4

4. Start a business

While spending more time at home during these last few years you might have discovered or developed a talent, such as woodworking, painting, or baking with sourdough. And now you want to turn your hobby into a side business. Your tax return could serve as seed money to build up your inventory or develop a website for your new money-making gig.5

5. Fund a college education

The price of a higher education is expensive. Setting up a college funding account with your tax refund may ease the future financial burdens of an education.

According to U.S. News data, the average annual tuition at public and private schools in the 2022–2023 academic year has increased. Tuition at a private college averages about 4 percent more than the previous year versus just 0.8 percent and 1 percent (for in-state and out-of-state students, respectively) at a public school. Currently, the average annual cost of a private college education is $39,723 and a public college education is $10,423 (for in-state students) and $22,953 (for out-of-state students).6

Many Americans use student loans to help pay for their education. In fact, more than 42 million borrowers have federal student loan debt.7

To help offset the price, consider investing in a tax-advantaged vehicle, such as a 529 plan, well before your loved one heads to the halls of academia. Tax benefits include tax-free earnings and withdrawals for qualified educational expenses. Also, a 529 plan will not negatively impact your child’s ability to qualify for federal aid.8

In the end, don’t let the high price of a college education scare you. Every dollar you save is one dollar less you have to borrow. If you’re able to contribute $265 a month (or $3,200 a year, which is the average amount of many family’s tax returns each year), your child will be well on his or her way to saving for college.

Work with a financial professional to determine which investment vehicle is right for your situation. 529 Plans aren’t the only option out there.

6. Add it to your HSA

Some health insurance features a high deductible plan that offers a heath savings account (HSA). There are some medical expenses that you might expect — like your child needing braces. But there are others that come out of left field — like your child being hit in the mouth with a baseball and needing emergency dental work.

And if you have private health insurance with a high-deductible plan, that trip to the ER (or any medical treatment) can come at a high price. A high medical bill might mean that you have to put off something else that you were looking forward to — like a much-needed family vacation or a home remodel.

7. Invest in your home

Your tax refund isn’t going to get you a new kitchen or bathroom. But it can open the door to smaller remodeling projects that are on your home improvement to-do list.

And some improvements will save you money down the road — allowing your tax refund to make an even greater impact. For example, you might want to replace your old appliances with energy-efficient models. Or, perhaps you’re ready to replace that drafty entry door.

Also, replacing a tired-looking backsplash, getting new faucets or adding a coat of paint to well-worn walls can do wonders for a home. Or sprucing up your yard with some pretty perennials will leave you feeling good.

8. Invest in your family

The main reason we work is to care for the needs of our loved ones. So, it’s no wonder that we think of them when we receive a large tax refund.

When we have their physical needs covered, sometimes the best thing we can provide them with is time spent together doing something fun. In fact, research shows that experiential purchases contribute more to our overall happiness than do material purchases. One reason is because we’re more likely to second-guess our material purchases than our experiential ones.9

Now that the world has opened up, you can choose from a plethora of fun experiences — such as visiting a zoo or a museum, attending a play or a concert, or taking a cooking or an art class. Thinking bigger? Use that tax money to start a vacation fund. Whatever experience you choose, you can revisit it again and again by talking about it with friends and family.

9. Help others

It’s more clear than ever that we need each other. Consider donating to an organization in your community that you connect with.

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A 529 plan is a tax-advantaged investment program designed to help pay for qualified education expenses. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover education expenses. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals.

Your state of residence may offer state tax advantages to residents who participate in the in-state plan, subject to meeting certain conditions or requirements. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other professional to learn more about how state based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state’s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan.

This information is a general discussion of the relevant federal tax laws provided to promote ideas that may benefit a taxpayer. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. Taxpayers should seek the advice of their own advisors regarding any tax and legal issues specific to their situation.

1. Picchi, Aimee. “Tax refunds: Here’s where Americans get the biggest IRS refunds,”, April 15, 2022.

2. Dilworth, Kelly. “Average Credit Card Interest Rates: Week of Nov. 23, 2022,”, November 23, 2022.

3. “Tracking the COVID-19 Economy’s Effects on Food, Housing, and Employment Hardships,” Center on Budget and Policy Priorities, February 10, 2022.

4. Brandon, Emily. “IRA Contribution Limits for 2023,”, October 24, 2022.

5. “12 Smart Things to Do With Your Tax Refund,”, November 17, 2022. 

6. Kerr, Emma; Wood, Sarah. “See the Average College Tuition in 2022–2023,”, September 12, 2022.

7. Hanson, Melanie. “Student Loan Debt Statistics,” Education Data Initiative, October 26, 2022.

8. Cain, Sarah Li. “How 529 college savings plans work and why you should consider one over a high-yield savings account,”, May 25, 2022.

9. Rettner, Rachael. “Study: Happiness Is Experiences, Not Stuff,”, December 8, 2021.

DOFU 12-2022