8 best ways to use your tax refund

Written by
Marty Duren
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As sure as green in spring and yellow in fall – if you live where the seasons turn, at least – tax filings come each year. Some taxpayers get on preparation like a perpetual New Year’s resolution, maybe hoping the early filer will get more of the refund worm.

Others wait it out, praying April 15 will magically fall on a weekend every year, securing them a 48-hour reprieve like the hangman slipping on a banana peel.

Taxes, as we know, are certain. For most of us, anyway.

According to a 2022 study, around 75% of American taxpayers will get a refund. Early in the 2022 return season, the average refund was about $3,200, but refunds are projected by the IRS to be somewhat smaller in 2023, at least for those who claimed an earlier Economic Stimulus Payment when they filed their 2021 return.

Many Americans anticipate using their refund for an awaited goal whether a home improvement, vacation, or debt pay-off, which are all valid uses assuming you’ve taken the time to plan. If you have a refund coming in 2023, here are a few ways you might use it so it doesn’t disappear into the cash-flow void..

Put it in savings

After years of interest rates so low they would embarrass Ebenezer Scrooge or Mister Potter, 2022 witnessed rate increases, most noticeably in high-yield accounts and online CDs.

When the stock market fluctuates wildly, some investors might feel safer earning up to 4% in a savings instrument like a money market fund or CD, vehicles that earn interest with nearly zero risk.

One thing to keep in mind is that even an instrument earning 4%, much less a standard savings account earning less than 1%, will not keep up with inflation. But a 4% interest bearing account as of mid-December 2022 leads the S&P 500 by around 23%.

Warren Buffett won’t come calling for advice, but it ain’t too shabby either.

Invest it

“Buy when everyone else is selling and sell when everyone else is buying” is more than just a market mantra. When you see red ink all over the DOW, NASDAQ, and S&P500, there are likely bargains to be found.

“History tells us that the market is cyclical,” Daniel Gilbert explains. “There have always been up and downs in the market. If you imagine a clock, assume that 12:00 is when the market is at a peak and 6:00 is when the market it at a bottom. Ask yourself, what time do you think it is right now? If you believe it is between 4:30 and 6:00, now is a great time to invest.”

Looking for a tax-advantage? Consider investing your refund through a traditional IRA (of which there are innumerable choices). If you anticipate a healthy number of deductions for your filing in 2024, a Roth IRA might work better for you.

Another tax advantage can be gained by increasing your 401(k) withholdings – especially if you still have access to your company’s matching contributions. Whether your company matches 25%, 50% or 100%, it is free money. Companies that match dollar-for-dollar give you an immediate 100% return on your contribution and you still get the benefit of pre-tax contributions.


You can make many investments until the tax deadline of a given year (April 15) and have them count toward your prior year tax status. Take a look at this “End-of-year personal finance checklist” to see whether there are still some steps you need to take.

This strategy allows you to increase your 401(k) withholdings, then use your tax refund to supplement your cash flow as needed. When you’ve used all your refund to make ends meet, reduce your 401(k) withholdings to the previous level. It’s a win-win.

Pay down debt

Unless you have a 0% loan with no danger of exceeding the payback time, paying down debt is never a bad idea.

It will benefit you to pay down consumer debt carrying significant interest since it is nearly impossible to nab an investment profitable enough to offset that interest expense.

Work on your credit score

Continuing the theme of improving your financial position, a tax refund offers the opportunity to fund the security deposit of a secured credit card. That, in turn, could mean a better credit score, better loan terms and access to even better credit cards in the future.

Secured credit cards can be used just like traditional, unsecured cards; the difference is that you establish your line of credit with a security deposit the issuer holds until you close the card or transition to a non-secured card. Often, the minimum security deposit is $200, which might be a high bar to meet as part of your normal budget. But you could fund it with your tax refund.

Responsibly using a secured credit card is one of the fastest ways to improve your credit score and is often the only option for people just starting to build their credit or someone recovering from poor financial circumstances that ruined their credit in the past.

Donate to charity

There are at least two good reasons to consider a charitable donation from your tax refund.

First, it gets you a head start on 2023’s tax breaks. Admittedly, this is a less attractive option tax-wise for middle-income earners since the raising of the standard deduction in 2017’s Tax Cuts and Jobs Act. The standard deduction now exceeds most middle-earning households’ charitable giving (around $2,500 in 2020) and mortgage interest deductions combined. This single change made it “unnecessary for many taxpayers to itemize since they could no longer take both the personal exemption and itemize deductions.”

However, for higher-earners charitable donations serve as an effective way to avoid the tax man.

Second, charitable giving helps meet societal needs often not included in governmental support. Religious organizations, food banks, museums and educational institutions are but a few of the entities that depend on charitable gifts to survive. Giving to entities like these supports society and, usually, supports something important to the person giving. it may also offer health benefits for the giver.

Prepay expenses

Can prepaying a lump sum save you money on any of your ongoing bills? Often it can. In addition to bundle discounts when you combine your home/renters/car insurance policies with a single provider, some companies also offer “paid in full” discounts for paying for the year up-front.

But it’s not just insurance policies that offer deals like this.

As of this writing, the Paramount+ streaming service is offering a 1-year prepay option that nets users the equivalent of two months free.

A limited number of news outlets also offer prepay savings on subscriptions. Bloomberg, for instance, averages out to about $10/month savings with an annual plan.

The savings on a single prepay might not be huge, but a few dollars on several – made possible by a tax refund – can add up through the year. Furthermore, even if there isn’t a prepay savings, at least you can mark off that bill for the rest of the year.

Complete overdue repairs or home projects

Tax refunds are one of the best ways to bank roll your home maintenance or improvements. From a few hundred to a few thousand dollars each year, you can take care of painting, weatherproofing, upgrading or small repairs.

Tired of your non-descript front yard? Ready to update the builders-grade flooring or colorize your living room paint? Plant a few trees, bushes and flowers or upgrade your indoors courtesy of your income tax refund.

Using your refund for projects that range from semi-expensive to expensive allows you to get the work done without wrecking your monthly budget. Plus, make smart choices and you could even increase the resell value of your home.

Whatever option you choose for your refund, just remember not to jump the gun. In a release, the IRS cautioned taxpayers “not to rely on receiving a 2022 federal tax refund by a certain date especially when making major purchases or paying bills. Some returns may require additional review and may take longer.”

Splurge! (and earn a signup bonus)

Not everything has to be “adulting.” As long as your budget is otherwise under control, not every purchase has to be planned, budgeted and explained.

Sometimes a splurge is the reward you need for managing your income and living within your means the other 364 days of the year.

If you decide to splurge, consider whether it’s time to apply for a new cash-back credit card or travel rewards card; your splurge could help you earn a hefty signup bonus on that new card. Just be sure your splurge doesn’t bleed into overspending and wreck your ongoing budget. No amount of credit card rewards will offset interest charges.

My wife and I have used a couple of travel points cards for a while, but recently decided we would not be traveling much in 2023, so we applied for a cash-back card with rotating bonus categories and a signup bonus. The bonus was decent with a low threshold for earning it – so low we got it during the first billing cycle.

Marty Duren,
CardRatings Contributor

Compare card offers with the amount you have available to spend, then let your card pay you back or use the rewards to make your splurge even bigger!

So, if you get a refund, enjoy it and spend (or save!) it wisely wherever you put it to work for you.

Marty Duren
Cardratings Contributor

Marty Duren is a freelance writer who lives outside Nashville, Tenn. He writes on a variety of subjects and is especially interested in topics that help people better navigate life. Marty enjoys family and reading, usually while officiating fights between Scout, an ever put-out calico...Read more

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