Maximizing tax refunds and savings

Quick insights

• A tax refund occurs when a taxpayer has paid estimates or paid (through withholding) more in federal or state taxes than what was owed
• A refundable tax credit is a credit you can get as a refund even if you don’t owe any tax
• Some taxpayers choose to put their refund toward their savings
• A high yield savings account, emergency fund or investments are places where you can save your tax refund

The average tax refund, according to the IRS, in 2024 was $3,050, up from $2,910 in 2023. If you’re expecting a tax refund in the coming year, you might be considering how to use it effectively. While these are averages, you may want to discuss your financial situation with a qualified tax professional to understand your options.

In the article, we’ll discuss some ways you may be able to use a tax refund to grow your savings and potentially improve your financial outlook.

How tax returns work

Tax returns are what you file with the federal and state governments every year to declare how much you made in income and how much you already paid in taxes that year, including taxes withheld from your paychecks. If you paid more tax than you owe, you may be eligible for a tax refund from the government.

Tax refunds can happen for several reasons, including:

• Withholding more from a paycheck than needed
• Changes in tax laws
• Changes in your deductions
• A refundable tax credit is a credit you can get as a refund even if you don’t owe any tax, such as the Earned Income Tax Credit

However, tax refunds are not guaranteed. For all of the same reasons listed above, you may find that you paid too little on your taxes. In such cases, you may owe money when you file your tax return and have to pay penalties.

When will you receive your tax refund?

Generally, the federal and state tax filing deadline is April 15th. That means you’ll need to file on or before that day to avoid paying potential late fees or penalties. In certain years, the deadline may shift slightly if April 15th falls on a weekend or holiday.

If you need extra time to file your taxes, you can request an extension from the IRS, but this may affect how quickly your return is processed. The extension is only for filing your return. You must still pay any tax you owe by the April filing date.

The IRS issues a tax return only after receiving and processing the filing. You can check on the status of your federal refund by visiting the “Where’s My Refund?” IRS website.

How to budget and save with your tax refund

A tax refund can be a significant lump sum of money. How you choose to use your refund may depend on several factors, including your:

• Financial goals
• Debt
• Savings

When deciding how to use your tax refund, creating a budget could help you plan the most suitable option.

Saving vs. paying down debt

If you want to best use your tax refund, you may be wondering if it’s better to add to your savings or pay down debt. There may be benefits for both options:

• Saving: Putting your tax refund into savings could help build a financial cushion or contribute to a significant financial goal
• Paying down debt: Paying down or eliminating debt can reduce the amount you pay in interest over time as well as provide financial peace of mind

When deciding between debt and savings, one consideration may be interest rates.

Savings interest rates

Putting money into a savings account could earn you money via interest over time. Using a high yield savings account may provide a higher interest rate than other savings accounts. Regardless of the rate, though, setting money aside in a savings account can be a helpful way to meet certain financial goals.

Debt interest rates

If you’re paying off debt, you may want to consider how much interest you are paying on that debt. For example, you could be paying 20% interest on a credit card balance and have a car loan with a 5% interest rate. Paying off high-interest debt might help reduce the amount you pay in interest over time.

Paying off debts with a tax refund

You might consider whether using some or all of your refund to pay down debts makes the most financial sense. If you have multiple debts, you may want to consider how best to use your refund to make the biggest impact.

There are a few debt payoff methods, including:

• Debt snowball: Paying off your smallest debt first
• Debt avalanche: Paying off the loan with the highest interest rate first

The snowball method can be a good option if you feel motivated by small victories. By using the avalanche method, it’s possible you may save more money by eliminating higher interest.

If you’re unsure how to tackle your debt, consider consulting with a financial professional to help decide your best course of action.

Putting your tax refund in savings

Saving your refund may help you prepare for major financial goals, such as buying a home or preparing for retirement. You may want to consult a financial professional to help make the most informed decisions with a tax refund.

Putting your refund in savings may help grow your money over time through interest. Some ways you can use your refund include:

Investing

When thinking of saving versus investing a tax refund, it may be helpful to remember that investing is typically geared toward long-term growth and greater potential returns. But it also may involve higher risk. People invest in assets like stocks, bonds, real estate and other valuables when they believe those assets could gain value.

Other savings options include Roth IRAs or 529 college savings plans, both of which are funded by after-tax dollars. Earnings in these accounts can grow tax-free and withdrawals may also be exempt from taxes if certain requirements are met.

Emergency fund

An emergency fund is a savings account where you keep money for unexpected expenses. An emergency fund can help you manage unexpected financial challenges, such as a loss of income.

Some financial experts recommend putting 3-6 months of expenses in an emergency fund. Having that money set aside in a savings account will continue to earn interest over time.

Saving for future expenses

A tax refund may also help you save for future expenses. Future expenses might include significant purchases or investments you are planning for. That could include buying a house, traveling or purchasing a new car.

Having money set aside in a dedicated savings account for these expenses will help you see how much you need to save to reach that financial goal.

In summary

Before you file your taxes, it may be a good idea to have a plan for what you want to do with your tax refund. Consulting with a financial professional might help you determine a course of action.

Consider your personal financial situation and goals to help you determine where your tax refund can best be utilized. That could include putting the money in a high yield saving account, investing it or using it to pay down debt—or maybe a combination of all three. Being prepared before tax time could help you better manage your refund and financial plans. Early planning could help boost your financial goals when you receive a tax refund.