Takeaways
- The Internal Revenue Service processed over 230 million tax returns in 2023.
- A tax refund means your tax payments were higher than your tax liability.
- The average tax refund was $3,050 in 2024; over $185 billion was returned to tax filers.
- Tax filing software automatically walks you through tax deductions and credits.
- Tax returns can boost personal finances by providing funds to catalyze paying off credit debt, saving an emergency fund, or starting to invest in stocks or crypto.
Tax season can be full of surprises and a bit of tax filing anxiety. For some tax filers, that apprehension can become a complete joy when they realize they will get a much-needed tax refund. And once you know a tax refund is coming, the question becomes how to use your tax refund.
A cash tax refund can be an absolute windfall for your financial situation. But that only remains true if you spend your tax refund wisely and use it to better your personal finances. Here, we explore nine ways to effectively use your tax refund to increase your net worth from various angles. But first, let’s examine the ins and outs of a tax refund.
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What Is a Tax Refund?
A tax refund is a direct deposit or check the IRS gives you because your tax payments exceed your tax liability. Here’s how it works.
When you file your income taxes, you must gather all your income sources, including your Form W-2 income sources, side hustle incomes, interest income, and dividend income documents. If you leverage one of the best online tax filing software, they can automatically pull in this information from your employer, online stock brokerage account, and bank or credit union, making the tax filing process virtually seamless.
- Average Tax Refund: $3,050 was the average tax refund distributed to tax filers in 2024.[1]
Once your income is fully accounted for, you will investigate tax credits and deductions you can use to lower your tax liability. Throughout the year, your employer, side hustle employer, and other income sources will pull income taxes from your paycheck and send it to the Internal Revenue Service (IRS).
At the end of the tax year, you are owed a tax refund if your tax payments exceed your tax liability. A tax refund means you are going to get money back. You can receive your tax refund as a deposit into your bank account or receive a check. Remember, you can only receive a tax refund if you file your income taxes. The IRS makes it super simple to follow your refund status through the Where is My Amended Return portal.
9 Ways to Use Your Tax Refund
A cash infusion from a tax refund can provide much-needed liquidity to your finances. Here are nine ways to utilize this cash deposit to improve your finances quickly:
1. Pay Off Credit Card Debt
One of the easiest ways to increase your net worth is to decrease your outstanding debts. Paying off high-interest credit card bills can be a terrific way to use your tax refund.
Whether you subscribe to the avalanche or snowball debt repayment method, getting rid of credit card debt is a financial win. Not only will this help improve your finances, but it will also lift the burden of high-interest payments eating away at your hard-earned income.
Read More: What Is Debt Consolidation?
2. Pay Off Student Loans
While credit card debt is usually the highest-interest debt on the totem pole, student loans often make up the bulk of the highest debts for recent graduates. Young professionals, or HENRYs, burdened by high student loan payments can eliminate a chunk of their student loans with a large tax refund.
Even if you are receiving the average refund amount, throwing a cash refund deposit toward your student loan balance could be the catalyst you need to pay off your student loans for good.
3. Save an Emergency Fund
Another way to improve your financial situation is to start an emergency fund. Personal finance experts advocate saving at least $1,000 and up to $3,000 to avoid financial distress.
Most Americans have difficulty scraping together $1,000 in case of a financial emergency. You can give yourself some breathing room by putting your emergency fund in a checking account or high-yield savings account.
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Emergency Fund Calculator
4. Start a Slush Fund
If you already have an emergency fund, you should graduate with a slush fund savings. A slush fund is a savings fund that contains at least three to six months’ worth of living expenses. You can beat inflation and earn interest income by stashing this cash in a high-yield savings account.
You can use your tax refund to start or top off your slush fund account. You can use our plug-and-play smart money slush fund calculator.
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Quontic High Yield Savings Account
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5. Invest in a Certificate of Deposit
Certificates of Deposits, or CDs, are interest-bearing savings accounts banks and credit unions offer. CDs are great investments to store large amounts of cash if you don’t know exactly where you want to invest.
Our Picks: Best Certificate of Deposits
CDs will limit your access to the funds for the CD’s term but will pay you interest income. Parking your tax refund in a high-interest CD can be a terrific use of your tax refund. Investing in a CD generally gives you a higher interest rate than a savings account.
- Searching for more yield? Read about 9 Low-Risk Investments That Will Generate a Return Despite the Market
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Consumer Credit Union CD
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APY: 5.00% on 13 month Certificate (Terms Apply)
Required Minimum: $250
6. Buy a Jumbo CD
Not all CDs are created equal. Depending on the size of your tax refund, you might be able to invest in a jumbo CD. A jumbo CD is a certificate of deposit account with a higher minimum deposit amount (sometimes $100,000 or more).
Fixed-income investors love jumbo loans because they provide a stable passive income stream. For investors who need more exposure to fixed-income investments or want financial independence, this can be a terrific use of capital.
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Alliant Credit Union CD
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APY: 5.10 % (Terms Apply)
Required Minimum Balance: $1,000
7. Invest in Stocks
You don’t have to be rich to invest in stocks. Learning how to buy your first stock can be one of the key inflection points on your financial journey. Whether you are an accredited investor or a traditional retail investor, starting to invest in stocks early is a smart move.
Anyone can start an online stock brokerage account to begin trading stocks, bonds, or REITs. If you like earning passive income, you could use your tax refund to buy dividend-paying stocks. Dividend payments can be reinvested through a dividend reinvestment program (DRIP), and you can compound your earnings even more.
Learn More: What Is Compound Interest?
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8. Save for a Down Payment
Owning a home is one of the fastest ways to increase your net worth over time. However, many people feel priced out of today’s housing market, and one of the most significant barriers to entry is amassing your down payment. It is hard to save for a down payment while renting, but an unexpected tax refund could spark your need to help meet your saving goal.
Read Also: What Is a Home Equity Line of Credit (HELOC)?
Many traditional mortgages require a down payment of at least 20% of your home’s purchase price to avoid paying private mortgage insurance (PMI). Adding to your down payment can increase affordability, accrue more home equity, and pay off your mortgage faster.
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Down Payment Calculator
9. Invest in Cryptocurrencies
Investing in cryptocurrencies has become increasingly popular since the rise of Bitcoin in 2008. Using a tax refund to fund your first cryptocurrency purchase can derisk tipping your toes into the world of crypto. The good news is that buying Bitcoin and other cryptocurrencies (like Ethereum) can provide much-needed diversification for your investment portfolio.
You purchase cryptocurrencies on cryptocurrency exchanges, like Coinbase and Kraken, and expand your investment aperture. You can select what account to use and whether you want to store your crypto in a cold wallet or a hot wallet.
If you don’t want to purchase crypto coins directly, you can always explore investing in Bitcoin ETFs, which you can buy through your online stock brokerage account.
Learn More: What Is a Crypto Wallet?
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Smart Summary
A tax refund is a cash deposit for overpaying your tax liability during the tax year. Receiving a tax refund can surprise many tax filers, especially if you realize you have overpaid significantly throughout the year (this can happen if you get a new job or make high payroll deduction elections). Using this cash windfall to advance your financial situation is a smart move. You can capture momentum by paying off high-interest debt, investing in high APY interest-bearing investments, saving for a home, and more.
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(1) Internal Revenue Service. 2024 Filing season statistics — Individual income tax returns. Last Accessed January 13, 2025.
(2) Internal Revenue Service. Where’s My Refund? Last Accessed January 13, 2025.
