Tax Refund: Spend It, Save It, or What?

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Last updated on July 23, 2019 Comments: 19

This article is presented by Kelly Whalen, Consumerism Commentary staff writer.

Should you be one of the millions of Americans (nearly 75%) who receives a tax refund this year, you may be making all sorts of plans for your money. Some people will plan to spend it and some will plan to save it. What’s the best use of your refund?

As a personal finance writer, from now through April I hear from many readers who don’t know what they should do with their tax refund. The average tax refund is over $2,600. That’s quite a few clams!

You have three options, and I’ll offer several ideas on how to use each option.

1. Save your money.

  • Emergency Fund: If you don’t have one, using your tax refund to jump-start an emergency fund is an excellent use of your money.
  • IRA: If you throw the money you anticipate getting into an IRA you can get an even bigger tax break. Jump-start your retirement savings, and save on taxes as well.
  • Long-Term Savings: Are your emergency fund and IRA fully funded? Save it for a nice boost for your car replacement fund, down payment fund, or other savings goal.

2. Spend you money.

  • Pay off debt: Many Americans will spend their money on necessities, reducing their consumer debt. This offers the most bang for your buck. If you are debt-free, keep reading.
  • Needs: Many people put off larger purchases, whether because they can’t afford it, or the expense is painful. Use your tax refund as a means to purchase something that is needed. Whether it’s a new set of tires for your car, or a new water heater.
  • Wants: If you’re a frugal person who has their finances in order it’s likely that you don’t spend a lot on things you want. Now is the time to spring for the vacation you always put off or a new wardrobe to replace your dated work clothes.

3. A combination of spend and save.

Saving and spending portions of your income tax refund is a balanced approach. That way you get to take care of something important or necessary, as well as have some fun with your money.

A word of wisdom: If you are getting a large refund, you should consider changing your withholding on your paycheck. You can print out a W-4 from or pick one up from your Human Resources Department. While many people, including myself, receive refunds due to the sheer number and variety of deductions and credits they have, you may be able to adjust your withholding so that you receive more money in every paycheck.

Rather than wait all year to get a large check you can set up your own refund system by automatically debiting your checking account on each payday to send the “extra” money to a savings account, or specific debt. You still won’t see the money in your account, and at the end of the year will have that much more saved or paid off.

Do you typically get a tax refund? If you will be this year, what do you plan to do with your money? If you need some more ideas, here are ten ways to spend your tax refund for fun.

Article comments

Anonymous says:

As nice as it is to get a tax refund, it’s actually better if you don’t because that means the government hasn’t owed you money all year. Instead, that money was in your accounts hopefully earning you some interest or saving you some interest if you are paying down debt. I won’t likely get much of a tax refund this year, but if I do I hope to use a little to treat myself but the rest will go towards our mortgage.

Anonymous says:

That was easier for me when our finances were simpler. This year we paid almost nothing in federal taxes, and we are still getting a refund! It’s hard to have a “normal” year, we always seem to have something that’s new or different.

Anonymous says:

With the Energy Star (Stimulus) rebates going on right now, it’s not a bad idea to consider spending it if you have some broken (or nearly broken) appliances. Then unload the old ones on Craigslist!

Anonymous says:

Both, I look at it as unexpected income, something you should just be happy if it comes but never expect it. There may be little things you can spend it for and just save the rest. For example I am joining a few sports leagues this spring and will use that money to pay for them and if I have any leftover will save.

Anonymous says:

Only one thing in mind and that is the mortgage. 3 months closer to complete debt freedom!

Anonymous says:

That qualifies as paying off debt. 😉

Anonymous says:

We had a huge dental bill last year (about $16,000), and the resulting medical expenses deduction combined with the Making Work Pay credit means we’re getting back about five grand. I usually try to make it so we come out just about even – some years we owe a bit, some years we get a small refund. This year is definitely out of the ordinary for us. We’re planning to finish funding our HSA with the refund.

Anonymous says:

Wow, that’s a huge dental bill, and we’ve had some big ones.
Great idea to use it to fund your HSA!

Anonymous says:

Over the last ten years my April 15th has been boring; +/- $200 either way. This year, I get it all back (due to medical expenses) but it will be just as boring. I’ll be sending it directly back to the reserve account that the medical bills were paid from.
Dan: Speaking of how Schedule D works…
a. My Company paid me a bonus in 2008 which was paid out of a Trust Fund of the Company’s stock
b. After everybody made up their minds about their bonus pay-out (Stock, Cash, mix) there was a residual amount.
c. The Trust (fiduciary responsibility and all) had to distribute the excess to each member. They did that in 2009.
d. Since my title didn’t begin with a C (CFO, CEO etc.) the “bonus” was paid out as Wages/Salary/Other Compensation. Read W2
e. I retired 12/31/2008 so it was the only W2 I got in 2009. $54.18
f. Schedule D says I get a $3.00 Making Work Pay tax credit. The only work I did for the Company in 2009 was responding to a letter asking me to verify my address & phone number (I think they were checking to make sure I was still alive). That took about 5 minutes.
Work really does pay when you get $650.16 an hour and a tax credit to boot.
I felt like a lawyer 😉

Anonymous says:

LOL, love that!
Congrats on retiring, hope you are enjoying it!

Anonymous says:


You can claim up to 10 dependents on your W-4 (withholdings form) without having additional paperwork filed with the IRS.

In my case, I’m expecting an abnormally large refund (for me) this year — to the tune of $5700 or so. What happened? A few different things: I got married, got the “work pays” tax credit, and my wife gets a tuition credit.

Let’s break it down:

1. Since I make a decent income, my wife doesn’t need to work while she is still in school. The rule with the IRS is that your marriage status on December 31 determines your filing status for the entire year. In my case, I had my withholdings figured at the single rate at the beginning of last year. When you’re married on a single income, you get double the standard deduction for a single, and an additional exemption. Then, my income as a single is squarely within the 25% bracket, and married, is squarely within the 15% bracket. So that added up to a HUGE savings. When I realized this in the fall, I had already paid my tax bill for the year! So *anything* paid for the last three months would be refunded back to me. (Unfortunately, changing my W-4 resulted in a reduction in withholdings, but didn’t eliminate them entirely.)

2. I have a fairly good handle on my tax situation, but I missed the way the Work Pays credit is figured. Getting married and all, I was wondering if I was getting the appropriate amount. Turns out that the credit is figured on Schedule M, and is calculated as an additional payment on the 1040 itself. So in my case, I had an extra $800 that I wasn’t expecting! (Remember, all of the PR for this credit says that it comes back to the employee in the form of reduced withholdings, and that the employee must do nothing at all to benefit from it. That statement couldn’t be further from the truth.)

3. My wife benefited from the American Opportunity Educational Credit. That was good for about $2100.

So try as a I might to avoid it, I still got a huge refund. (Ok, maybe not huge to some people, but larger than average.) Although some people like it, for me, this wasn’t good. I have several thousand dollars in credit card debt that I accumulated before I started this job — had I had this money throughout the year, I would have saved several hundred in compound interest payments.

Anonymous says:

Oops, that showed up under your comment above, and I meant it to go under @ldub’s!

We have claimed more than 10 for awhile, and never had to file any extra paperwork, I’m not sure what you mean by that.

While it would have saved you a few hundred dollars, I guess you can comforted to know you can pay off a huge chunk of debt with your refund. I’m sure next year you’ll be more prepared. It’s tough though when you have a life changing situation, or there are odd credits like Making Work Pay.

Anonymous says:

i think i’ll always aim to be one of the “get a refund” people – i just can’t deal with the anxiety of thinking i *might* have to pay in more taxes, and i always end up using my refund for a combo of fun/awesome/goodtimes and smart moves. the little bit every check? i know i’d end up spending it on burritos or something! plus, the 0% plus peace of mind return from the “loan to the gov’t” is arguably as good as my ING interest right now…

Anonymous says:

You don’t “pay in more taxes” if you have to write a check to uncle sam in April. Your tax bill is your tax bill — if you get a refund, you paid too much in taxes. If you have to write a check, you didn’t pay enough — but the total amount owed is the same regardless.

For me, however, I’d say the ideal situation would be to get a tiny refund — like $100. The exception would be if I expected to owe, and I was saving for it. But an unplanned tax bill isn’t fun. See my comment below, and quite frankly, too big of a refund sucks too — my wife’s tuition credit aside, I deprived myself of $300/mo that could have been used to pay credit card bills.

Anonymous says:

I think your sentiment is shared by many people, I know I’m more of a spender too.

Anonymous says:

“Unfortunately” this year despite really wanting a tax refund after the numbers are crunched, I don’t think I’m getting one. Which brings me to an old point that refunds for the most part are just fine and dandy because most people can’t save for cookies!

If I had a refund, I’d plow it back into Financial Samurai and invest in my future, of course! 🙂

Anonymous says:

Good point. I know a lot of people tell me they prefer getting a refund since they would spend that cash otherwise.

Anonymous says:

I occasionally get a refund, but generally I have to pay a little. One year we got granite countertops with our refund, which I remember because I hated our old 70s fake butcherblock ones so much. Otherwise I think maxing out an IRA is a great suggestion.

Anonymous says:

Granite? Swoon. Except I need a whole kitchen makeover.
We always get something back, it comes from having so many little tax deductions. 🙂