Many people treat tax refunds like found money and simply spend it.
If you are getting a tax refund this year, don't make that mistake. That's your hard-earned money and you just loaned it to the government on a interest-free basis. If the refund is large, the first thing you should do is adjust your tax withholding by filing an updated Form W-4 with your employer. Then figure out how to use the reduction in withheld taxes to help you achieve your financial goals.
What about the tax refund check you're getting this year? Consider the following options:
Pay down your credit card or other debt. Many credit cards charge high interest rates and any interest paid is not tax deductible. If you aren't paying your credit card balances off in full every month, consider using your tax refund to pay down some of that debt.
Fund an individual retirement account (IRA). Currently, you can contribute up to $6,500 (up from $6,000 in 2022) to a traditional or Roth IRA - provided you meet the eligibility criteria. If you are age 50 or older, you can contribute an additional $1,000 (also unchanged from 2022) for a total of $7,500. You don't have to contribute the maximum amount. Even if your refund is only $500 or so, consider putting it in an IRA.
Set money aside for your children's college education. Been putting off starting a college fund for your children? Consider contributing your tax refund, up to a maximum of $2,000 to a Coverdell Education Savings Account (ESA). Or consider a Section 529 plan. In 2023 you can contribute up to $85,000 - $170,000 if you split the gift with your spouse - in one year and count it as your annual tax-free gift for five years (up from $75,000 and $150,000 respectively in 2022). The funds can later be withdrawn on a tax-free basis to pay qualified education expenses.
Just remember that tax refund is your money, so find a way to use it to help achieve your financial goals.
