How to Put Your Tax Refund to Work—the Smart Way

How you use your 2023 tax refund is nobody’s business but your own—yet advisors can’t help but weigh in.

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Year after year, accountants and planners say they witness taxpayers splurge their refunds on everything from high-end espresso machines to island vacations. Such spending often is a result of misconceptions about refunds, and taxpayers fail to get the biggest bang for their bucks. 

“Often people look at a refund as found money that lands in their bank accounts,” says Ashley Weeks, a wealth strategist at TD Wealth. “Realign your thinking to what it actually is: It is a loan that you made to the federal government that you are being repaid for. Then you can use that money like you would any other asset, not just as money to be spent.” 

There is more on the table this year for many taxpayers to plan around. The IRS reports that the average refund on 2023 returns was $3,081 as of March 22, up 6% from $2,903 for the 2022 tax year.

The bump in refunds is primarily due to significant inflation adjustments to key tax bracket thresholds for 2023, which allows for more income to be taxed at lower rates, and a bigger standard deduction.

For the 2022 tax year, couples who filed a joint return paid a 37% income-tax rate—the highest rate—on income of more than $647,850. On 2023 income, the highest rate kicks in on income of more than $693,750

All thresholds were adjusted, so no matter what your income you are likely to benefit. 

A single taxpayer with $95,000 in taxable income had a top tax rate of 24% in 2022, but for 2023 it will top out at a 22% rate, because the threshold between the two brackets was raised to $95,375 from $89,075. 

The standard deduction, which is used by taxpayers who don’t itemize deductions, got a boost to $27,700 for married couples filing jointly for 2023 from $25,900 for 2022.

For singles and couples filing separately, the standard deduction rose to $13,850 from $12,950, and for heads of household to $20,800 from $19,400. 

While many taxpayers are thrilled to receive a refund, the goal for taxpayers should be to adjust tax withholdings and estimated quarterly tax payments so they can get as close to a zero either owed or refunded upon filing their taxes, says Colleen Carcone, director of wealth planning strategies at TIAA.

Achieving a neat zero balance is unrealistic, but don’t be worried about erring on the side of owing the IRS a little to avoid lending the government your money, she says. 

If you owe less than $1,000, or your withholdings and estimated tax payments amount to at least 90% of your taxes owed this year or 100% of your 2022 taxes, you generally won’t face penalties. 

“Nobody likes to write a check in April, but if you hang on to your money rather than overpaying your taxes, you could be investing it or using it to earn interest,” Carcone says. 

If you get a refund, your first consideration should be whether to use it toward quarterly estimated tax payments for 2024, which are due on April 15 along with any 2023 taxes owed, Weeks says. 

“If you haven’t already received your refund, you can elect to have it applied to that estimated payment,” he says.

The next priorities for your refund are to feed it into your emergency fund to cover three- to six-months’ expenses, and to pay down high-interest debt, says Alanna Morey, a private wealth advisor at Ameriprise Financial.

“This may sound boring but when you consider how high credit card rates are it makes sense to knock it out,” she says.

You can also get extra mileage out of your refund by squirreling it away in an IRA, 401(k), health savings account (HSA) or 529 Plan thanks to their tax advantages.

“If you look back at your past 10 years of refunds that you spent on discretionary purchases you’d be hard-pressed to remember what you spent it on even last year,” says Gary Corderman, managing director at Farther.

But if you put the money in a tax-favored plan you wouldn’t only still have that money, but also the compounded returns and any other tax benefits that came with your contributions. 

If you invest the average refund amount, $3,081, in a Roth IRA earning an average annual 7%, in 10 years you would have nearly doubled your money—and with a Roth, you would owe no taxes on the gains.

Splurging may be a perfectly fine option for a refund, but only if it’s part of a plan, says Mike Prinzo, managing principal of tax at CliftonLarsonAllen.

“The important thing is to have discipline around your decision,” Prinzo says. “The best thing for an individual might be that they need a vacation. There’s data on mental health benefits on doing things like that. Our role is to bring data so clients can make the best decision.”

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