What Should I Do With My Tax Refund?

If you are among the people who had too much taxes withheld and you are getting a refund, congrats. I owe taxes because of my “all-1099” status all year, and even with paying estimated taxes every quarter, I still owe money! When I was working for the man I always tried to break even on my taxes, so that I did not get a refund or owe any money – that way, they didn’t get to keep my money all year and I didn’t have to come up with anything at the end of the year. But this year, I bet everyone would enjoy getting a tax refund with the way the economy is! If you are getting one for the 2008 tax year, this is not the year to blow it on wasteful spending, but rather give some thought to your overall financial health right now instead. In these times, is there something else you should be doing with your money? Let’s take a look at a few options:

Pay Off Debt

This should be priority #1 if you are getting a tax refund. Credit card companies are changing their interest rates, terms, and special offers, which could leave you high and dry paying an astronomical interest rate on your credit card debt. Using your tax refund to pay off debt is a very simple way of getting a guaranteed return on your money. Imagine yourself with less (or better, no) credit card debt – feels good, right?

Contribute/Top Off Your Emergency Fund

If you do not have an emergency fund but still carry credit card debt as well, I would definitely use some of your tax refund to fund a small emergency fund. (Then use the rest to pay off debt) Emergency funds enable you to breath a little sigh of relief that if something small came up (car accident, unforseen doctor visit, etc), you can pay cash for it instead of charging more debt. If you are not carrying any debt at all, I would put my entire tax refund into my emergency fund. Why? People are getting laid off left and right, and knowing you have some backup money just in case can definitely ease some of your anxiety about what may happen.

Fund Your Retirement Account

Already paid off your debt and have a sizable emergency fund? I would put that refund into my retirement account then. I know a lot of people (myself included) have lost quite a bit in the market, but it will come back eventually. Depending on your age/proximity to retirement, this choice might differ, so I would ask a professional for their advice. But for me, I would be adding to my Roth IRA and Solo 401K for the year.

Give To Charity

Right now, there are millions of people lined at shelters, soup kitchens and for food stamps. You could always give a small cut of your refund to help out those who need the most help in these pressing times.

Spend It On Your Family

Take the family on a vacation; there are deals to be had right now. Need a new car? Consider using your refund as the downpayment on the hundreds of cars available at 0% interest right now. Keep the money to send your kid(s) to a cool summer camp. Really think about where and to what that extra money could make the biggest difference and have the most affect on those you love.

Are you getting a tax return? What are you planning to do with it? I think the biggest thing people used to do with them was to go shopping, but I do believe that times have changed. So I am curious as to what you think…let me know in the comments!

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Comments (9)

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  1. Neal Frankle says:

    I like the priorities listed here and I agree completely. The only minor point I’d add is that if you do have debt, find out why. If you don’t address that core issue, you’ll likely find yourself right back in the same debt disaster.

  2. Tim says:

    With the economy the way it is right now, contingency fund wins out for me. I would also add hitting up the IRS web site for the withholding calculator and finding out what I need to do such that I have that money today rather than getting a refund next year. It took almost 10 years to convince my wife that getting a refund was a bad thing, and that with good money management having to pay a little was an even better thing.

  3. Slinky says:

    My tax return is going to get my piano tuned (splurge), contribute $20 towards replacing my computer headphones (splurge), top off my efund to 4 months basic expenses, and pay down my car loan.

    I always give myself a (proportional) splurge from a windfall before directing the rest towards my current goal. I think an eFund should get funded before paying down debt unless your position is very secure, or paying down the debt will significantly improve your financial position.

  4. frugalcpa says:

    We’ll let it accrue interest for awhile and then use it to pay some of our subsidized student loans off before they become unsubsidized.

  5. Tina says:

    I did my taxes on line and received my refund two weeks after I received my W-9 from my employer. I used a half of it to pay off cc debt(2 cc’s gone!!!), start my first savings account in 10 years(set the acct up to autowithdraw on my paydays) and have 470.00 left to see my family in the fall. Married with single income and no children.

  6. Richard says:

    Paying off debt is certainly where our tax refund will be going this year. We also have property taxes due around the same time. Fortunately, this bill from our local government is tax deductible, which is a plus.

    I agree that the goal is to have no return. This means that you are planning accordingly and are making the most of your money. It makes more sense to invest the funds (even if its in a bank account) versus having the government hang onto it. TurboTax (and others) have some handy calculators to help adjust the amount you claim on taxes.

  7. RateNerd says:

    Tax Refund? What Tax Refund? All I ever do is write checks to the government so they can go waste my money on wars and pork. At least fix the stupid potholes for goodness sake!

  8. Meg says:

    We are using ours to continue to finish our basement. While not a necessity, we’ve determined that it will add to our home usability, enable more hospitality and in general, it’s a good use of our money. We’re committed to paying down debt with my income and living on my husband’s. Of course, we’ll be doing most of it ourselves and count ourselves blessed to be related to a contractor, an electrician/apprentice, and a former painter/drywalling finisher. 🙂

  9. Iranian Lover says:

    I agree. Just as soon as I receive my Refund Check, it clears my Bank, I will donate to the needy. Myself as well.