Getting a Tax Refund This Year? Best Ways to Use It

With tax season upon us, Americans have been receiving their income statements from employers and gathering documentation. Filing tax returns on time is key. Although there are some downsides to getting a tax refund, there are benefits as well. Here are tips for the best ways to use your tax refund.

A tax refund is simply when you have overpaid the IRS in the past tax year, so you end up getting money back. Even if you get only a small refund, it's wise to plan how you'll use it. Check out these suggestions for what to do with your tax refund.

The best thing to do with tax refund money is to build up your emergency fund. If you don't have an emergency fund, aim for $500 or $1,000 to start with. This will cover you in case of emergency expenses like car or home repairs. Most experts recommend having 3–6 months worth of expenses in a savings account.

If your emergency fund is set, you can then pay off debt with your tax refund. If you have credit card debt or other consumer debt, these often come with high interest charges, so you want to pay those off fairly quickly.

As the Supreme Court will soon decide whether Biden's student loan forgiveness plan can proceed, you can wait to resume loan payments. But in case forgiveness doesn't happen, or you owe more than the eligible forgiveness amount, you could set aside money for when student loan payments resume.

With your tax refund, once you've covered the emergency fund and debt categories, you can put remaining funds into a retirement account. Investing in a 401(k) or IRA will provide you with income when you retire.

Another good use of a tax refund is to get yourself any missing insurance coverage. You may need life insurance to provide for your loved ones in the event of your death, or other insurance to protect yourself.

Although it isn't as fun as spending the money on a vacation today, saving for a future expense is one of the best ways to use a tax refund. If you have a wedding, trip, down payment on a house, or other expense looming, setting some of your tax refund aside for those costs could help you stick to a budget.

If you've held off on a needed home repair or improvement, that can be a good use of a tax refund. Car repairs are another item to consider.

Perhaps you'd like to learn a new skill or gain a certification in your current career. Tax refund money could help you to pay for required training to advance your career and income.

One of the best ways to use your tax refund is to make a charitable contribution. You can even deduct charitable giving from the following year's taxable income. Use your refund to help make the world a little better.

Finally, it's fine to spend some of your tax refund on something you want. A splurge on something you enjoy is a great option, as long as you aren't stuck with large debts or no emergency savings.

It's fine to spend a bit on fun, but don't blow your whole refund on unnecessary expenses. Buying a depreciating asset, such as a car (unless you need one) or boat, is one example to avoid. Remember that a tax refund isn't free money; it's your money that you overpaid to the IRS.

Also, avoid putting the refund into a low-interest account, since there are better options like retirement accounts or high-interest savings accounts.