skip to main content

How to Use Your Tax Refund During Uncertain Times

Written by
Ashley Altus, CFC
Ashley Altus is a personal finance writer who covered financial planning with a focus on money management and household finance for OppU. She is a Certified Financial Counselor through the National Association of Credit Counselors. Her work has appeared with O, the Oprah Magazine; Cosmopolitan Magazine; The Smart Wallet; and Float.Today.
Read time: 5 min
Updated on July 31, 2023
OppU banner logo
Many Americans who live paycheck to paycheck depend on this influx of cash to reset their finances for the year. Are you one of them?

If you’re still waiting for yours to appear, you can use the IRS’s “Where’s My Refund?” to monitor where you are in the process. Most income tax refunds take about 21 days to appear if you’ve requested a direct deposit to your checking account.

As of the end of March, the average IRS tax refund for the 2020 season (or 2019 tax year) was just under $3,000. Many Americans who live paycheck to paycheck depend on this influx of cash to reset their finances for the year. It can also be helpful for those facing financial uncertainty or job loss due to the national and worldwide impact of the coronavirus.

In a 2020 poll, a majority of Americans said they preferred to receive a lump sum of cash in the form of a tax refund instead of having that cash available through their paychecks during the course of the year.

“When our counselors advise consumers to adjust their withholdings status to put more money into their regular paychecks, the consumers often decline that advice,” says Marty Lynch, compliance manager and director of education at Cambridge Credit Counseling. “For many reasons, they prefer to get a large check in the late spring, hoping to catch up on their bills.”

While this extra money can give you an instant financial boost, waiting to receive it until after you file your tax return may not be beneficial. Instead, you may be missing out on money throughout the year that could help with your monthly spending.

If you do have a tax refund coming your way, as many Americans do, the following three suggestions can help you use this money responsibly and kickstart your financial goals.

No. 1: Consider adjusting withholdings

A tax refund of $1,000-$2,000 may not amount to an excessive amount of taxes that are being withheld from your paychecks throughout the course of the year; however, if your tax refund is between $3,000-$4,000, it may be time to have a conversation with your human resources department about adjusting the withholdings on your W-4 form.

“Why would you want to give this interest-free loan to the government all year when you need the money month-to-month to survive?” says Linda Jacob, an accredited financial counselor and director of education at Consumer Credit of Des Moines.

If your finances are currently tight and your income tax refund is on the large side, making this change could be one way to give yourself an automatic raise.

No. 2: Pay down debt

Decreasing the burden of high-interest debt, such as a large credit card balance, can be liberating -- both financially and emotionally -- and give peace of mind. That’s why paying down unsecured or credit card debt is one way to make good use of your refund money.

“Using a tax refund to pay down debt isn’t glamorous, but it will boost your credit score and help you pay less [when you] borrow on your next loan,” Lynch says.

On average, Americans have $6,194 in credit card debt, according to the Experian 2019 Consumer Credit Review. For this reason, Krystal Pino, CPA, PFS, founder of Nomad Tax, suggests using the money to pay down high-interest debt obligations to keep the interest from piling on.

“If you’re carrying credit card or loan balances with interest rates higher than what your money could earn in an investment vehicle, the wisest use of the tax refund is to pay down your balance and avoid the ever-surmounting interest,” Pino says.

No. 3: Set money aside for an emergency fund

While we may have good intentions to save our tax refund instead of splurge, our financial decisions don’t always reflect this. Just six months after receiving a tax refund, most Americans only had 28% of the original amount left, according to the JP Morgan Chase & Co. Institute.

If you don’t have an emergency fund, which is common for many, your tax refund check can be an ideal place to jump-start your savings goals. It’s common for financial advisers to recommend having at least three months of living expenses tucked away in a high-yield savings account to put towards emergency savings just in case of a job loss or medical expenses.

“It’s not if life happens, it’s when life happens,” Jacob says.

If you’re in a position where you will need access to an emergency fund or extra cash sooner rather than later, we have some additional articles that can help guide you:

No. 4: Invest in yourself

If you haven’t started a retirement savings account, creating a traditional individual retirement account (IRA) or Roth IRA can be another financial goal to take on with your refund. Traditional IRAs give you a tax break on the money you contribute now, and a Roth IRA gives you a tax break on the money you withdraw from the account later.

You can use your tax refund to invest in your financial future, but also to fulfill entrepreneurial ambitions or continuing education, depending on your financial situation.

Lynch has seen several individuals use their tax refunds to start their small business. “The most productive refund use nearly always falls into one of two camps: starting a business or going back to school,” Lynch says.

No. 5: Make a plan

Once you find out that you’re going to receive a tax refund, put a plan in writing, Jacob recommends. For example, if you can commit to saving throughout the year, adjust your W-4 withholdings so you can take advantage of the power of compounding interest, instead of Uncle Sam holding onto your money.

“Decide on how you want to spend it before you get it,” Jacob says. With your personal finance goals in check, it could help to boost your bank account through next year and beyond.

Article contributors
Linda Jacob

Linda Jacob is a certified financial planner and an accredited financial counselor. She currently works for nonprofit Consumer Credit of Des Moines as a financial counselor and the director of education. She is author of “No More Paycheck to Paycheck – Stop Living in Debt and Start Living the Dream,” and is a member of the Financial Planning Association and the Association for Financial Counseling, Planning and Education.

Martin Lynch

Martin Lynch, a PFE-certified debt management professional, is the director of education and compliance manager at Cambridge Credit Counseling, a nonprofit credit, housing, and student loan counseling agency located in Agawam, Massachusetts. He is on the board of directors of the Financial Counseling Association of America. He provides free financial literacy seminars to veterans, students, teachers, and inmates preparing to re-enter the community.

Krystal Pino

Krystal Pino founded Nomad Tax in 2018 to help digital nomads navigate their complex tax issues.  She is a certified public accountant and personal financial specialist with more than 10 years of combined industry experience.  She earned a bachelor’s of arts in accounting and a master’s of business administration from the University of Alabama at Birmingham.

California Residents, view the California Disclosures and Privacy Policy for info on what we collect about you.