How to spend a tax refund

tax refund

Hey, average American, what are you planning to do with the tax refund you are about to receive? So let’s start with useful ideas for spending your tax refund for those in the first stage of personal finance and work our way up to those who are less pinched. Depending on which stage of personal finance describes your current financial situation, your tax refund can help you along if you plan carefully.

Before we go there, though, why are you getting a refund in the first place?

The Arguments Against a Big Refund

First, let’s examine the reasons a person shouldn’t get a big tax refund. (You’ve probably heard these statements before!)

  1. “You’re giving an interest-free loan to the government!” The implication is that this is a stupid idea, but it isn’t quite as helpful as the following arguments.
  2. “You’re cheating yourself of cash flow!” If you receive a refund, extra money has been withheld from each paycheck. For some, this money can make a real difference in day-to-day living. In fact, it may be the difference between having to use credit or not. So there is merit to this argument, but it doesn’t apply to my situation. I’m not that pinched.
  3. “That money could be invested at a high rate of return!” Now, this argument I grant to be convincing, and I don’t have a rebuttal. Not only does a tax refund give your money to the government interest-free, it also deprives you of the opportunity to earn a return on your money.

If there are clear reasons not to get a tax refund, then why do it?

The Argument for a Big Tax Refund

I suspect that everyone who chooses to get a big tax refund does so for the same reason — it’s a psychological trick. It’s like a self-imposed, forced savings plan. It might be the only way your emergency fund gets started.

Okay? Now back to our options.

How to Spend a Tax Refund (Wisely)

1. Don’t spend a single penny before the money arrives in your bank account.
Don’t charge something on credit cards; don’t promise to spend the money; don’t put a deposit down with the rest due the day you expect the refund. You never know what unexpected expense might cause you to be staring down a final payment or contract fulfillment without anything left in your bank account but hope.

2. Don’t go on a spending spree after the money arrives either!
Seeing that nice chunk of change in your bank account could put you in the mood to splurge. Instead, deposit your refund directly into your high-yield savings account until you can make a list of all the things you have been wanting or needing over the last year. Then prioritize these items and start making a plan for these funds with the next suggestion.

Related >> Which Online High-Yield Savings Account & Money Market Account is Best?

3. Make a budget or spending plan before you do anything else.
It’s amazing how quickly a refund can disappear without a plan. So once you know how much your refund will be, create a spending plan by listing all your income, fixed expenses (bills you have to pay every month), and your debts. Think ahead, too, about any large expenditures that might be on the horizon. With everything listed in one place, you get a better picture of how to make the best use of your refund.

4. Apply the refund to one of your debts.
Do you have credit card debt? You may want to negotiate your credit card balance first. Then, use the refund to pay off the card or make a dent in a card balance. Of course, you can apply the refund to a car loan or student loan debt as well. Pick the debt that bothers you most, or, if they all irritate you equally, pick the one with the smallest balance or the highest interest rate — whatever will motivate you the most to continue your cause to get out of debt.

5. Build your savings.
A refund is the perfect seed money for the emergency fund you have been hoping to start. College savings for your child? Maybe you need to start saving for a replacement vehicle? Are you planning to get married or have a baby? A healthy savings account balance can help you achieve your goals and work toward financial independence, so build your savings with all or part of your refund.

6. Buy things that will save you money.
If your expenses and savings are well covered, you might consider buying things that can help you save money in the future. Think about upgrading windows or adding new insulation (to save on energy costs), get a couple of bus passes or another bulk purchase of something you use very frequently. Maybe a bike could turn your commute into a workout or eliminate the need for a second car, thereby reducing your insurance bill. Maybe you can buy half of a cow from a local farmer, saving you tons all year on quality meat — or maybe a chest freezer to make that possible. Have a baby? Buying a stash of cloth diapers can save you money over time — and save the environment as well.

7. Buy things that will make you money.
Before I talk about traditional investments, I want to encourage you to think about a different way to develop a good return: Invest in yourself. Can you use your refund to help you learn different skills, take an interesting course or go to a conference that can help you increase your income?

8. Invest it.
Use your refund to start funding your traditional or Roth IRA.

Maybe you want to get your own index fund. If all your other goals are met and you are on solid financial ground, you could even use a little bit to buy a few individual stocks just for fun.

If you truly are trying to save with the money, the U.S. government has an option for you: buying U.S Savings Bonds. Instead of getting a cash refund, you can designate up to $5,000 of your refund to be delivered in actual paper bonds issued in your name.

I Bonds are savings bonds that are indexed for inflation. The earnings rate on an I Bond has two components:

  • The first is a fixed rate that remains the same for the life of the bond.
  • The second is the variable “semi-annual inflation” rate. Twice each year (on May 1st and November 1st), this rate adjusts based on the current inflation rate.

The fixed rate and the variable rate are combined to get a composite rate, which is currently 1.48 percent. I know this is a lot of gibberish. All you really need to know is that I Bonds are a safe place to put your money so you don’t have to worry about it losing value to inflation.

Because of this, I Bonds are an attractive alternative to a savings account, especially now. They offer higher rates of return, and I Bonds are state- and local-income-tax exempt. (Federal income tax on I Bonds can be deferred until the bonds are cashed in or stop earning interest after 30 years.)

One drawback? I Bonds are not as liquid as high-yield savings accounts. You can cash them out whenever you want; but if you do so before five years, the bond is subject to a three-month earnings penalty. It is sort of like breaking a certificate of deposit early (which is another investment option some might consider.)

Related >> Best CD Rates | Certificate of Deposit Rates

9. Make your life easier.

One of my retired friends has been saving for years and has always tried to be responsible with her money. While she was still working, whenever she got a raise, she increased her contribution to her retirement accounts.

Recently, I met her for lunch shortly after she lost both of her parents. “Once we sell their house, we’ll have a small inheritance. I’ve always tried to save, but this time,” she said in a firm voice, “I decided I don’t really need to save any more money. No, this time, I want to use the money in a way that makes my life easier.”

She has a point. We have hardwood floors in most of our house and, while I would eventually like to have a long wool runner in our entry area, I have been making do with a hodgepodge of rugs that are mismatched and cheap-looking. Since they aren’t substantial, the little feet that walk on them all day long shift those rugs all over. It drives me crazy. Using part of our refund to buy the rug would definitely make my life easier.

10. Spend 5 percent or so on something nice.
Go out to eat with your family (once). Buy yourself comfortable shoes or some cool, new gadget. (You probably have a favorite splurge.) If you have been wanting to support a local artisan and, again, all your other goals have been taken care of, you may want to use your refund for that too. Work to build strong ties in your community by purchasing groceries for an elderly neighbor, giving a gift to a dear friend, or helping a college student purchase books.

As you can see, there are a multitude of ways to spend your refund. Use it wisely and it could motivate you to even greater financial success!

If you are expecting a tax refund this year, how do you plan to spend it? Was it a fluke, or is getting a refund part of your strategy?

[Editor’s note: An earlier version of this article appeared on February 2, 2012. The original comments were retained in case they provide value to the reader today.]
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There are 149 comments to "How to spend a tax refund".

  1. MoneyforCollegePro says 02 February 2012 at 06:15

    My No. 1 DO NOT DO with a tax refund is to get a Refund Anticipation Loan (RAL) and pay interest to receive your refund early. Don’t spend money without cause!

    • Cybrgeezer says 02 February 2012 at 08:42

      I’m a little surprised that, at 10:41 a.m. EST, I’m the first person to give this important suggestion a “thumbs up.”

      • Florida Bill says 02 February 2012 at 09:31

        Just a thought, but it might be because this board is made up of readers who already know this is a bad idea and see no need to comment or ‘Like’ a very good, and very basic, suggestion.

        • Beth says 02 February 2012 at 12:32

          Or the fact the “like” button doesn’t always work. (At least it doesn’t for me!)

    • SB @ One Cent At A Time says 02 February 2012 at 11:37

      The No#2 for DO NOT DO with tax refund, is plan any spending around it. I let it go quietly in to my retirement account. My take home pay is enough to cover for spending needs. This is extra money, I should spend when I am not earning any more.

      • Joanna says 02 February 2012 at 16:10

        Then why not just reduce the amount you pay in tax each paycheck to better reflect what you owe, then increase your retirement contribution throughout the year? You’re throwing away retirement interest/growth for nothing. At least some people claim they’re doing it because they want to have a “forced savings”.

        • Money Infant says 02 February 2012 at 19:24

          That is pretty much what I’ve done. As a self employed individual I’ve found that it was necessary to file quarterly taxes. In the beginning it was a bit of a pain in the a**, but I have come to really appreciate the increased control I now have over my taxes. Once a year isn’t enough to get a true picture of how to reduce your tax burden, but with quarterly payments I get to make tweaks 4 times a year. And I am never more than $100 off one way or another when I file in April.

          #3 DO NOT DO – Don’t set yourself up to get a tax refund in the first place!

        • SB @ One Cent At A Time says 02 February 2012 at 19:25

          Thanks for the alternate view Joanna. To me, there is no single way of doing thing. You are right I do it to keep my spending in control. It may work better for you to reduce withholding to pay lesser taxes from payroll. For me its another way to save extra money.

        • Elizabeth @ Broke Professionals says 04 February 2012 at 13:49

          I agree with your sentiments, Joanna. My dad’s a tax professional, and for years he’s urged me and my husband to change our withholdings so we get more money in each paycheck. I’d always loved getting a big refund check and was reluctant to make the switch… last year was the first year we finally did so, and it made a huge difference! There’s no going back now.

  2. Joe says 02 February 2012 at 06:27

    In Canada, we get a larger tax refund when we put money into RRSPs (Registered Retirement Savings Plan) – it’s similar, in my understanding, to a 401k. I’ve been putting my tax refunds (larger because of the RRSP deduction) directly into my TFSA (Tax-Free Savings Account). The TFSA is filled with after-tax dollars (and then it remains tax-free forever, if used properly), so it seems perfect to fill it with a large tax refund ๐Ÿ™‚

    • Elizabeth says 02 February 2012 at 06:38

      Me too! This year I’m thinking TFSA instead of RRSP for a good portion of my refund even though it will still be earmarked for retirement. I’m trying ti diversify a little more.

    • Marianne says 02 February 2012 at 08:00

      I’ve had more than one person this year tell me that I should be putting my money into TFSA’s rather than RRSPs with no knowledge of my financial situation. I am not sure where this info is coming from. I am fully aware that there are some times when a person would be better off to use a TFSA to an RRSP however, in my case with no pension etc., I could put $100 into a TFSA and pay no tax on the interest earnings. Or I could put $100 in my RRSP get back $40 from the government and put that in a TFSA or whatever else I choose and pay no tax on the interest earnings. I am clearly ahead if I go the RRSP route. I know there are times when people should choose TFSAs over RRSPs and also understand the need to diversify but I am frustrated by this ‘blind assumption’ that I’m finding everywhere that TFSAs are the way to go and RRSPs are some antiquated savings account of the past.

      • Beth says 02 February 2012 at 12:44

        Funny, I keep seeing the opposite! People keep telling me to put money in an RRSP so I can take advantage of the home buyers plan. (Not sure I will, though.) My advisor recommended I put my home down payment in the TFSA to shelter as much of it as possible from taxes.

        Once I buy my home, I’ll deal with whether the TFSA should be for part of my retirement plan and for my emergency fund. Right now it already has a job.

  3. So You Think You Can Save says 02 February 2012 at 06:32

    We earmark most of ours for various savings goals we have, including saving for when we need to replace the car, car and home repair work, major expenses for the kids. We do put aside around 10% for travel and vacation so that’s pretty much the fun aspect of it.

  4. Elizabeth says 02 February 2012 at 06:36

    All good tips! My tax return is no where near that high, but this is the first year majority of it won’t be going towards student debt.

    I noticed charity was left off this list. I know many people tithe or give a portion of their income to good causes — and isn’t a tax return technically income? Even if people (wrongfully) view it a mini windfall, many people still donate part of a windfall.

    I am by no means saying anyone has to give away any of their income or tax return. I was just surprised to see it excluded as a possibility.

    • Jennifer+B says 02 February 2012 at 07:16

      No, a tax return isn’t technically income – it’s SAVINGS. You gave it to the government to pay your taxes and you gave them more than they need, so now they are giving it back to you.

      While I understand that the post is about what to do with this kind of windfall, I wish that it had touched just a bit on making adjustments to your withholding for next year to get more of that money into your pockets each payday instead of giving it to Uncle Sam for many months instead. Think of the interest you wouldn’t have had to pay if you had paid off those bills a little each month starting in January 2011 instead of waiting to do a lump sum payment in January 2012.

      And negotiating a smaller final settlement has consequences too – if the principal that is being written of is large enough, you’ll receive a 1099 from the company and you’ll have to report it as income to the IRS. A brief note about that would have been nice too…

      • Florida Bill says 02 February 2012 at 07:30

        Actually, a tax RETURN is neither savings or income nor, for that matter, investment or funding for a splurge. Those are possibilities for your REFUND. The return is the form you file; everyone files a return, some get refunds.

        I’m not a grammar Nazi, but the misuse of some words/terms we all should know bothers me.

        BTW, the article, both in the headline and content, uses the term ‘refund’ correctly without calling it a ‘return.’

        • Elizabeth says 02 February 2012 at 09:22

          D’oh! You’re right of course. Serves me right for reading GRS before breakfast. (I am sooo not a morning person.)

          REFUND REFUND REFUND. There. Now it should stick.

        • mike says 02 February 2012 at 09:27

          Bill aren’t we splitting hairs here. Isn’t the word refund a synonym of return? When I read the word return used above, I’m reallying reading refund. So while everyone files a “Return” you can only spend or whatever a return(refund). Inherently the article is discussing a refund and the comments are discussing what they do with their return(refund) not about filling out a return form.

        • Elizabeth says 02 February 2012 at 15:54

          @Mike I appreciate the back up ๐Ÿ™‚ It was a silly error on my part and I’m willing to learn from my mistakes. I’m giving Bill the benefit of the doubt and assuming he didn’t mean the last part of his comment to sound snarky.

        • Vanessa says 02 February 2012 at 16:22

          Some people call it a return, because it is taxes that are returned to them.

          I always call it a refund but I have no problem with either term.

      • Shane says 02 February 2012 at 08:00

        I could not agree more. Every year after I complete my tax return I fill out a new W-4 to adjust my withholding for the next tax year. If you are getting a large refund consistently, you need to adjust your withholding as well. It is very easy to adjust your W-4. In fact, the IRS has a w-4 calculator on their website that will help you do just that.

        Since I itemize my taxes each year, I usually estimate my withholding counting all of my expected deductions other than charitable donations. That way I know I should never under-withhold, because my charitable donations act as a buffer. The IRS calculator is usually so accurate that at the end of the year my tax withholding is within a couple hundred dollars of my tax liability for the year before taking into account my charitable donations.

        You can find the IRS withholding calculator at the following link:,,id=96196,00.html

      • Elizabeth says 02 February 2012 at 09:34

        Good point! Or the interest you could have earned had you had saved/invested the money within a TFSA rather than giving it to the government. (Or IRA? I’m still not sure how things work in the U.S., sorry!)

      • PawPrint says 03 February 2012 at 19:37

        But if you get a refund, don’t you have to include it on your tax forms the next year so that the refund is included in your gross income?

        • bdoubleu says 17 April 2015 at 04:47

          Ahh!! No, this is so incorrect. A tax refund from 2014 would NOT be counted as income in 2015. It was money you earned in 2014, over-payed in taxes, and is now refunded to you. You’ve already payed taxes on it.

        • Julie says 17 April 2015 at 21:19

          This would be true for state taxes, unless you are paying AMT and your state taxes are no longer deductible. State taxes are deductible for Federal Taxes, thus if you get a state tax refund, it becomes income on the Federal Tax refund in the year received.

    • Courtney says 02 February 2012 at 08:20

      We used to tithe – and we tithed on our pre-tax income, so the refund was never considered part of our income because it didn’t matter how much or how little was taken out of our paychecks in terms of how much we gave to the church (it also made our pledges a lot easier, because we knew exactly what our salaries were versus variable paychecks). I suppose if you tithed on post-tax income then for the purposes of a tithe the refund would be considered “income” – but if you owed money instead, you can’t ask your church to give you back a little of your donation ๐Ÿ™‚

      • Elizabeth says 02 February 2012 at 09:25

        See, that’s where I get confused — I know people who do tithe based on gross income and people who tithe based on net. No judgment either way — I was just wondering how the tax refund figured into the income.

        • PB says 02 February 2012 at 13:12

          Ideally, one should tithe on gross income, not after tax, because that is what your income truly is. However, it is very hard to do at times, and so our church encourages us to work towards it. Frankly, if our members just tithed their net income, we would have a lot more for missions!

      • Jacque says 16 April 2015 at 17:05

        We tithe on a pre-tax basis as well. It is a hot-button issue, no? I think “Give to God what is God’s and give to Caesar what is Caesar’s” sums it up nicely and people just over-complicate the issue.

        If we give our daughter $1 for allowance and wanted to teach her about personal finance, we’d have her give $0.10 for tithe and $0.15 (or whatever ridiculous rate it becomes) for tax. It doesn’t matter what order they are distributed, the portions remain unchanged.

        To tie it back to the refund issue, it wouldn’t matter if we decided that “oh, this time you only have to pay $0.12 in tax, so here is $0.03 back” because it is a separate issue from tithe, which has already been taken care of.

    • Sarah Gilbert says 02 February 2012 at 11:56

      Elizabeth, you’re right — as I went through the process of writing this post I just didn’t think of charity. Ironically, this morning, as I glanced at the comments in my inbox I also renewed my membership to a bicycle association and considered whether it was a good time to give the money I like to give annually to my undergraduate institution. I’m unchurched right now (a crisis of faith in churches, not a crisis of faith so much), so there’s no opportunity to tithe. I will, however, send a little money to my sister in Panama, where she and her family are working with some of the indigenous Wounaan communities (her husband is a Wounaan) — I am using this comment as a promise ๐Ÿ™‚

      • Amy says 02 February 2012 at 15:07

        Don’t want to thread jack or start an argument, but….am I wrong to think that a tithe can still be tithe (pre or post tax doesn’t matter to me as it does some people) regardless of whether it goes to a church or not? I’m unchurched at the moment for both reasons you offered but I still give. Not a tithe, but I still give a portion of my income. I know others who tithe – as in give 10%, but not to a church per say.
        Anyway – I think that charitable donations are a good way to spend some or all of a refund, if your personal financial situation allows you to do that! There are many worthy causes out there that could use support.

        • Elizabeth says 02 February 2012 at 16:14

          @Amy and Sarah — There are so many levels to the debate on tithing ๐Ÿ™‚ I’m looking to join a church, and it’s going to be a challenge trying to marry it’s expectations with what I currently do.

          I mainly brought up the idea because when I didn’t have a lot of money (like in my grad student days) reserving a portion of any “found money” for charity was a way I could give back. Some people would fault me for even doing that much as I was accruing student debt, and some would say it wasn’t enough. You can’t donate to please other people though.

      • Jacque says 16 April 2015 at 16:57

        Whenever my husband and I have been between churches do to moving, etc. we have always continued to give. We just increased our contributions to missionaries and charities that we also support so that our giving level remains consistent!

  5. KSK says 02 February 2012 at 06:45

    I am self-employed and have been for 15 years. If I pay too much in taxes for the year, I just have the overpayment (tax refund) applied to the next year’s quarterly tax payment.

    I haven’t seen a tax refund in a very long time.

  6. Dogs or Dollars says 02 February 2012 at 06:54

    I am very curious as to these wool comforters. Hmmmm…

    My list is already started. I do this will pretty much all “known windfalls” a few weeks before they are destined to show up. Take guesstimated amount and allot it to certain categories/expenditures. We can discuss and tweak this before the money even hits the banks account. When it shows up, I know where it’s all going. The money is usually gone after a few quick transfers and ‘check out’ clicks, removing any temptation to deviate from the plan.

    Course, a chunk of ours will be going to a new locally made quilted, latex inner’d mattress. Ahem… that may have already been purchased.

    • Sarah Gilbert says 02 February 2012 at 12:34

      Dogs or Dollars, you’re a spender after my own heart ๐Ÿ™‚ I bought a wool comforter, through a buying club, from a local company — Wisdom of Wool — and the locally made latex mattress is on my long-term list. If I sell my book… or maybe my second book… I’m getting a lovely new mattress! so far in my adult life I’ve only owned hand-me-down mattresses. a pity.

  7. Eileen says 02 February 2012 at 07:05

    I’m confused about #2. I understand the idea of killing off a debt, but confused about negotiating down what’s owed with a credit card company. Don’t you owe that amount? Didn’t you accumulate the debt and interest?

    This article isn’t about keeping a roof over your head, it’s about what to do with a tax refund. Why would a credit card company forgive some of your debt in this scenario?

    Maybe I’m missing something, if so my apologies.

    • Brenton says 02 February 2012 at 09:54

      In the scenario Ms Gilbert wrote about, the card account had been closed and was no longer active. Even being closed, she still owed the remainder of the balance on the account when she closed it, which had been there for a long time.

      In these situations, the credit card company might accept a lower amount in a one time payment because such long-closed accounts are prime for defaults. So they take a loss of potential profit in order to assure themselves of making some money. Some companies might say no, but generally speaking, the longer its been closed the better the chance the credit card lender will accept the one time lump sum payment.

      • Eileen says 02 February 2012 at 11:23

        Thanks for the explanation. I’m still puzzled at using that approach because, well…you can. If someone is getting “a tad bit less” than $7500, it stand to reason they can (and should) continue to re-pay their debt.

        I realize this is judgmental and may not be kind, and perhaps I’m just naive.

        I’m just struggling with a large tax refund, the discussion of custom made comforters or doing something nice, and then suggesting you negotiate on a debt that you owe.

        I still must be missing something.

        • Ash says 02 February 2012 at 11:57

          The answer is, because you can ๐Ÿ™‚

          It’s just a common practice of creditors to accept lower payments in exchange for finally being able to take an account off their books.

          Negotiating is just another way to save money, there’s nothing morally wrong with this. Would you not negotiate the best terms for a loan, even if you could afford to pay more?

        • Brenton says 02 February 2012 at 15:25

          Well, not paying it would be ethically questionable, but offering the person/company you owe the money to a different payment option(ie: Ill give you $500 NOW rather than $50 a month for a year), and giving them the option of not taking it doesnt seem unethical at all. You are still paying the money back. The other person/company is still satisfied with the result, so I dont see why it would be morally or ethically wrong at all.

          After all, the collection agency could just say no, take you to court and snag every last dollar of that refund until your debt is paid if they wanted to.

        • Heather says 03 February 2012 at 20:02

          It’s the same ethical effect of negotiating a lower interest rate, or a higher salary. As in, totally accepted and expected, not anything wrong or hurtful at all.

          Keep in mind, for every month of payments that need to be made on a debt, the company holding the debt has to employ someone to track the expected payment, receive the payment, check it off, allot the income, etc. etc. For a multi-thousand dollar debt that could be years to pay off at the current payment plan, getting (as in this case) $1000 knocked off the debt to have it settled and closed may well be saving the company money in the long run.

      • Julie says 17 April 2015 at 21:27

        I don’t believe that negotiating down a debt after a contract is signed even though you have the money to pay is the ethical equivalent of negotiating a lower interest rate or better terms prior to entering a contract.

    • Sarah Gilbert says 02 February 2012 at 12:03

      Eileen, this may be a case of one’s ethics as they collide with the realities of financial institutions. I did indeed spend the money (more than a decade ago. I was young and stupid!). but at this point the credit card company has long since sold the debt at a huge discount to a collections company, to whom I am paying. they’ve already made back all they paid for my debt and more. I could pay every penny, indeed; but that money would only go to buy a slightly nicer car for the principals of the collection company. as it is, I believe I’ve given a collections agency and their employees all they so richly deserve for striking fear of financial ruin into the hearts of hundreds of thousands of struggling Americans.

      so yes, in this case, if I can negotiate a debt held by a collections agency, I will. I only wish I’d negotiated better. If I was a perfect human being I wouldn’t have charged up the credit card in the first place. (and then, I wouldn’t have lost the job that was letting me pay the minimum payments each month… and then, I wouldn’t have hid under a financial blanket and waited until they sold them to collections agencies… etc. etc.)

  8. Nicole says 02 February 2012 at 07:06

    Why not just stick it in an IRA?

    Of course, ours (when we have a refund) always goes right back out towards estimated taxes for the next year.

  9. Todd says 02 February 2012 at 07:10

    As a side note, why are you getting a refund at all? If you did better tax planning, you wouldn’t get any tax refund. The refund means that you paid too much to the government over the course of the year, and earned no interest on that money between when you paid it and when you received it back from the government. If you want, you can give me $7500 today, and I will give it back to you a year from now. Feel free to spend 5% of the money I return to you on a splurge.

    • Brian says 02 February 2012 at 08:10

      You made the same point I was going to make, but after further consideration I realized that some people can pay nothing in all year and still get a refund with all the credits and deductions that are available these days.

      • Courtney says 02 February 2012 at 08:28

        Sarah specifically mentions the EITC, child tax credits, and the combat pay exemption. I doubt there was anything they could have done to their withholdings to account for all of that.

        • Marsha says 02 February 2012 at 09:55

          I don’t know about Sarah’s specific situation, but I compute what our tax liability for a year will be after all deductions and credits, and then adjust the number of exemptions based on that. We’ve claimed as many as 18 exemptions (family of 4) to make our withheld amount nearly equal to our tax liability for the year. That way, we keep more money in our paychecks. I usually have to write a small check to the IRS in April.

        • Courtney says 02 February 2012 at 14:29

          Right, but the EITC and child tax credits are fully refundable (meaning you can get more back than your tax liability). But taking an infinite number of exemptions isn’t going to get you to the point where the IRS will add that money to your paycheck in lieu of sending it to you when you file your tax return ๐Ÿ™‚

    • Courtney says 02 February 2012 at 08:25

      We do the best we can – one year we owed $12. But things don’t always work out quite that well and I know we are going to be getting a large refund this year for two reasons: 1) We put our condo on the market last March and figured our tax bill under the assumption that we wouldn’t have enough deductions to itemize. Well, the condo didn’t sell until September and the additional mortgage interest pushed us above the itemization threshold. 2) Hubs received an unexpected bonus in December, and his company does weird accounting on bonuses such that the withholding is usually 2x higher on that amount than on regular income even though it ends up as regular income on our tax return. So in short – life happened, we had a little extra withholding than we anticipated and a little more of our income that won’t be taxed.

      • Sarah Gilbert says 02 February 2012 at 12:08

        Courtney, that’s not weird accounting but the way nearly all bonus income works. It’s taxed as though it was the annual equivalent of whatever pay period basis your husband’s company operates on — so, if you get $10,000 bonus on a twice-monthly pay-period paycheck, you’ll be taxed at the rate for $240,000. some employers let you change your withholding just for that pay period, but it’s a pain, so most don’t.

        • Shane says 02 February 2012 at 12:16

          Sarah, that is not completely correct. Bonuses are considered “supplemental wages” by the IRS and employers are permitted to withhold federal taxes at either the same rate as they would for regular wages, or they can withhold at a flat rate (meaning they withhold at the same rate for all employees, regardless of their W-4 elections). Many employers choose the “flat rate” option, which is typically a much higher withholding rate (as a percentage of income) than the rate for regular wages. A typical flat rate many companies use is 25%. This only applies to the federal income tax withholding portion however. State income tax withholding (if applicable), FICA, Medicare and other withholdings can be treated in different ways depending on the state and on the employer.

        • Sarah Gilbert says 02 February 2012 at 12:39

          thanks for the clarification, Shane. it’s been a long time since I worked as the One Who Decides Payroll Things at a small company and I’d forgotten about this (or skipped over it because our bonuses were usually paid monthly). in any case, thank you!

    • ali says 02 February 2012 at 10:11

      I know this is going to sound ignorant -but how do you do this?

      • Guy says 02 February 2012 at 12:41

        Generally speaking, the easiest way is to get more up front is to increase the number of personal withholding exemptions you selected on your Form W-4 (likely when you started your job). If you contact your HR department, they should let you update that number appropriately. However, note that if you take too many, you may wind up swinging the pendulum too far and owing taxes when you submit your return.

    • Sarah Gilbert says 02 February 2012 at 12:17

      Brian and Courtney are right. we paid $0 in tax withholding this year — I’m a freelancer (who makes a lot less when my husband is overseas thanks to the work of juggling the house and children on my own) and my husband is currently in a combat zone, where taxes aren’t withheld or owed. someone else correctly noted that, technically, it’s not a “refund,” but an “entitlement.” (oh how I hate that word! a post for another day.) many of you probably think it’s unfair that your tax dollars are going to those of us who don’t make much and who have several children. honestly, your tax dollars are already paying my mortgage and my PGE bill and my grocery bill, because my husband’s a soldier. same would be true if I was a police woman or a senator or an IRS agent or the guy who works on the construction crew to fix the potholes in your road. that’s the whole point of taxes — we take the money from people who have it and put it where it does the most social good. it’s not me who decides what the social good is, but the people we elect into office. take it up with them ๐Ÿ™‚

      • Courtney says 02 February 2012 at 14:33

        Sarah, I DON’T think it’s unfair and as a taxpayer who has never had to make the sacrifices either you or your husband has, I’m more than happy to help cover your share.

        Incidentally I think it’s worth pointing out that those who would froth at the mouth about the 47% who “don’t pay taxes” probably never even think of people like you and your husband.

        • Shane says 02 February 2012 at 14:38

          Agreed. I wish there was a way you could direct how your tax money is spent, or at least give a preference. I believe our armed forces are underpaid and under-appreciated.

    • Sam says 02 February 2012 at 12:18

      I’m glad someone finally made this point, a tax refund, in most cases, means you gave the government an interest free loan. Better to adjust and make sure you get a very small refund or even if you have to pay a little.

    • Heather says 03 February 2012 at 20:20

      I personally haven’t had a steady income since I started working. Being on the verge of (and dipping into periods of) disability means that while my taxes may be set perfectly for a minimal owed/refund when I AM working, the subsequent unemployment for part of the year may mean I get a huge refund, like I did this year. Heck, I got back more than I paid.

      I point this out to you because it’s important for people to know that it’s not always an issue of “bad judgment” or lazy accounting. Sometimes getting a refund every year is simply a matter of what life hands you. Now, knowing that this is the cycle I’ve lived for 10 years, I could claim so many deductions that I don’t pay taxes out of my paychecks. But I figure the money I send in earns interest that pays for our soldiers, our buses, and the extra money I end up getting back at the end of the year. So I don’t mind.

  10. Jake says 02 February 2012 at 07:17

    Your tax refund should never be that high. Adjust your W-4 by increasing your exemptions.

    • Sara says 02 February 2012 at 09:46

      Jake, you’re exactly right, but it’s sort of confusing to figure out how to do that, especially when you’re not sure what the next year holds. For example, am I buying or selling a home? Will I get a big raise? Will I leave my job for another one with substantially different pay? I would be interested in hearing more about how people decide the exemptions/withholding.

      • Emily says 02 February 2012 at 10:32

        Use the IRS withholding calculator.,,id=96196,00.html

        The calculator lets you put in how much income and tax you have already paid for the year and estimate deductions. I put a reminder on my calendar every quarter to reevaluate and make any changes required.

      • csdx says 02 February 2012 at 20:21

        The easiest way is take your finances from last year and maybe take a few educated guesses like factoring out any one time things, fill out the estimator tool.

        Then if during the course of the year something drastic happens to change your tax situation, (big bonus, or bought a house, sold some stocks, etc) just fill out the estimate again based on the new info.

        You’ll get accurate information because it takes into account the income and taxes you’ve already done for the year, and will tell you how to adjust the numbers to end up on track for a $0 balance at year’s end.

      • Sara says 02 February 2012 at 21:51

        Emily and csdx, thanks so much!

  11. Poor to Rich a Day at a Time says 02 February 2012 at 07:28

    Not everyone overpays to get a refund, it is an income source when a large refund comes because you did not make that much money so you get earned income credit when you are pretty much exempt from taxes and not paying federal taxes on your income.

    For us, we are dividing our refund up to help boost our monthly income for the whole 12 months of the year. This is a huge relief to me knowing we will finally have a stress free above survival mode life this year after 2 years of barely making it.

    A monthly boost to our income will mean no worrying about how to get heat inthe house or not stressing the weeks hubby only gets 20 hours, no juggling utilities all year and not stressing over the food lasting all month.

    I am excited that we are dividing it up into 12 months this year, it wont be gone in a month or two and back to struggling!

    • Shane says 02 February 2012 at 08:09

      What you are describing is the earned income credit, which isn’t really a refund (since the money was never yours in the first place) but rather is a government entitlement program (similar to welfare) that helps supplement income for low income families with children that are working. I am glad to hear that my tax dollars are going to help people that really need the help. I volunteered for several years at a tax preparation clinic run by the IRS that targeted low income families that would benefit from the earned income credit. I prepared returns for many people whose income was less than $15,000 but that received income tax “refunds” of $6,000 or $7,000. We tried to keep these people from going to the tax preparation services that pushed them to take out refund anticipation loans that charged ridiculously high interest rates on what was virtually a risk-free loan.

      • Heather says 03 February 2012 at 20:23

        “helps supplement income for low income families with children that are working.”

        I don’t have children (single, only me in my tax household) and I get the EIC. So “families” and “with children” would both be inaccurate in that statement. Of course, you have to have earned income to get the earned income credit.

    • Beth says 02 February 2012 at 10:07

      Kudos, and best wishes for the year ahead! ๐Ÿ™‚

  12. Caleigh says 02 February 2012 at 07:31

    This is really great timing! I just received my tax return and although it’s nowhere near the amount listed in this post, it’s a little something extra. Unfortunately, I have to spend part of it on a bridesmaid dress I wasn’t counting on paying for until a later date. Oh well, at least I know where the money is going!

  13. Nick says 02 February 2012 at 07:39

    Yea… like a few other commenters have mentioned, I feel like the last step, after you do all this stuff, should be to re-evaluate your tax withholdings.

    Remember that a tax refund basically just means you gave the government an interest free loan for the last year.

    I have some family members that actually use a tax refund as a sort of savings account. The purposefully fill out their taxes so they get these huge refunds… which I never understood.

    As a general rule, it’s always better to have cash now rather than later so if you’re getting huge refunds (and are even halfway decent at managing money) you should adjust your exemptions or something.

    • Rosa says 02 February 2012 at 09:19

      If a large but unpredictable amount of your income is bonus or commission, aiming to not overwithhold can leave you owing a large amount at the end of the year. Some of the years I was on commission, even having a 1 or 0 on my W-4 left me with a refund big enough to go on a nice vacation.

      • Rosa says 02 February 2012 at 10:06

        (and now that it’s too late to edit, I realize it’s been so long since i made a lot of commission, I forgot how the W-4 figuring works – that should say “even claiming 4 or 5” not 0 or 1.) The recession has made my income a lot more predictable.

    • Laura says 02 February 2012 at 12:12

      I am apparently in the minority of being one of those people who is perfectly fine with giving Uncle Sam an interest-free loan for a year. Why? Well, as J.D. and others have said before, personal finance is as much (or more) about your mindset than anything else. To me, knowing that I will absolutely NOT have another unexpected expense landing with a whump on my doorstep by April 15 is reason enough to have more withheld than is necessary. I know when I do our taxes that we will not have to pay any more money; I know we will definitely get a refund, the question being how much.

      Having not been taught any personal financial management when young and with being as susceptible to frailties as any American exposed to Madison Avenue, we’re still early on in Dave Ramsey’s baby steps, still paying off debt and wanting to keep our $1K emergency fund for real emergencies, not paying taxes. Having a tax bill show up would rekindle all the past anxieties and negative feelings that arose every time we had yet another bill we struggled to pay. I would rather let the government have my money interest-free (not that interest rates are that great) because what I’m getting in exchange is peace of mind.

      • csdx says 02 February 2012 at 20:37

        Certainly if you need a kind of forced savings vehicle it can help, you can even ask for more to be withheld to make it a savings goal, the government’s certainly not going to complain that you’re giving them more money.

        Though I find it much better to just split out your paycheck yourself. If you’ve got a direct deposit, often you can direct funds to multiple accounts. So you can put that money aside without ever having a chance to spend it early. Just take that extra money you would’ve put toward excess taxes and instead fund an account at an entirely seperate bank.

        I find that more comfortable because that emergency fund will be available when you need it, not a year later during tax season. Plus there’s less temptation to treat it like a windfall and end up splurging excessively with it.

        To reduce temptation to just pull it out of the bank, you could make sure you don’t have any debit card or online access to the account. This ensures you’d have to make a special trip and go to a teller to withdraw that money.

  14. Jill @ Dollars-or-Cents says 02 February 2012 at 07:56

    I think it’s silly that the tax system is so confusing that it’s difficult (for me at least) to anticipate my tax refund, which prevents me from being able to plan my finances with a complete picture. Due to that, I don’t make any plans dependent on my refund, and just stick it into my savings account when I get it. Although I’ve been filing my own returns for a while, I suppose I should put in the time to understand exactly how it all goes down, so that it’s not so “black box” to me. Until then, this advice is a great guide ๐Ÿ™‚

  15. Bethany says 02 February 2012 at 08:01

    Wool underwear?

    • Sarah Gilbert says 02 February 2012 at 12:48

      as lingerie is to some women, wool underwear is to me. I started buying them this fall (all on sale so I did *not* pay $28 a pair) —,en,pd.html?dwvar_IBA377_color=F46&start=1&cgid=womens-underwear-panties

      they’re comfortable, natural fibers (very important for the stuff close to my skin), wicking, and wool has natural antibacterial properties. they last a lot longer than cotton and don’t stretch out like microfiber. sadly, I’m going to have to wait to buy some more until the next big sale or when I sell a literary piece, as I’ve already committed all my money from the taxes to other things.

      now you all know about my underwear!

      • Bethany says 02 February 2012 at 15:10

        I never thought I would want wool that close to my bum but those look pretty comfortable. ๐Ÿ™‚

  16. John | Married (with Debt) says 02 February 2012 at 08:04

    While we don’t spend it before we get it, we do earmark it well before we get it.

    This year it is going towards a European vacation.

    Last year it was our daughter’s tuition.

    I recommend people max their exemptions to make their paychecks bigger and their refunds smaller, but some just prefer letting the government hold their money so they won’t spend it.

    • Florida Bill says 02 February 2012 at 09:37

      I unsuccessfully used that argument with a friend who is proud that her annual tax refund is a minimum $6,000. When I pointed out (years ago) that it amounted to an interest-free savings account with the government, she was OK with that.

      Today, of course, it’s harder to make that argument because interest on savings, money market accounts, even CD’s is near zero.

      • Beth says 02 February 2012 at 10:02

        Especially if you have to pay tax on any interest. I just got my T5 slips for my non-TFSA accounts. The interest earned is small enough without the government taking a cut.

  17. Eric says 02 February 2012 at 08:16

    I treat it like savings. Put most of it in my EF. Being a single parent, my taxes vary from year to year. I adjusted my W4 to break even on the years I don’t have a dependent but I don’t change it for the years I have a dependent. Which means I get back a chunk of change those years. I don’t want to keep messing with my withholdings every year so I am fine with a refund every other year.

  18. Shawn G says 02 February 2012 at 08:32

    We owe again this year, so I will not be getting a refund. My wife’s part time job never takes out enough taxes, so we get hit every year. It’s become par for the course, and the money is already set aside, but one of these years I would like to break even.

    • Courtney says 02 February 2012 at 09:17

      My husband and I have roughly equal salaries, so even at 0 federal exemptions we come out about $6K short on withholding. We pay quarterly to make up the excess.

      • mary w says 02 February 2012 at 11:48

        Courtney – You can also have them withhold a certain dollar amount above and beyond the number of exemptions claimed. That’s what I do. For example, married, 0 exemptions, plus $123. You can also claim “single” on your W-4 even if your married and filing jointly.

        This is easier to me than having to remember to file quarterly.

        • Courtney says 02 February 2012 at 12:04

          You can – but along the same lines of over-withholding and “why let the government keep your money interest free?” why would we let them take it out of every paycheck when we can stick it in a savings account and earn a little interest on it? Granted last year it was only about $11, but you see the point.

          I don’t have to remember to file quarterly – I do the form in January and set up four equal automatic payments. It’s much easier to do that online instead of having to submit forms through one or both of our HR departments.

  19. Diane says 02 February 2012 at 08:34

    I second all the comments about adjusting your withholdings. I’m not a CPA and I don’t play one on TV, but I believe the rule is that you must only withhold an amount equal to what you owed the previous year to stay out of the IRS penalty box. I watch this amount carefully and then claim EXEMPT for the rest of the year. Works like a charm. If my income was drastically increased, I’d save some extra in an earmarked account. Unless you are self-employed as KSK #6 is, there is no reason to stockpile your cash in Uncle Sam’s larder.
    I get paid in a small check/big check cycle, so even claiming 99 exemptions was creating a huge refund check. My worth-every-penny CPA suggested this solution and I happily haven’t seen a big refund or even paid a large tax bill since. Your mileage may vary.

  20. Vanessa says 02 February 2012 at 08:36

    The best part is that I can count all these expenses against my income on next yearโ€™s taxes!

    I would love an article about how education/job search expenses can reduce your taxes.

  21. Ms Life says 02 February 2012 at 08:41

    One thing I usually do when I know I will get a windfall is go window shopping first if I have some big purchases to make. This helps me know exactly what the price is and where I have to get it. It also eliminates the temptation to buy other things while searching for what I need. This method has served me well in the past.

    • Sarah Gilbert says 02 February 2012 at 12:50

      smart, Ms Life. it’s nice to have the thing in front of us to work toward with our savings.

  22. Michele says 02 February 2012 at 09:02

    I’m concerned about #2. In my experience, this causes a Charge-off to be reported to the credit agencies and will stay on that report for 10 years. It’s extremely difficult to get new credit or lower interest rates with that on the report. And, as a previous commenter mentions, the credit card company may send a 1099 and taxes will need to be paid.

  23. Amy says 02 February 2012 at 09:11

    What is this tax refund of which you speak?

  24. doug_eike says 02 February 2012 at 09:26

    Frankly, I’ve never understood why people consider a tax refund to be some kind of yearend bonus that they can play with. Saving money is so difficult that, in my view, the refund should go automatically into savings.

    In the days when we got interest on our money, it made no sense to have a tax refund–all it meant was poor planning, loaning money to the government and losing the opportunity interest.

    • Courtney says 02 February 2012 at 09:35

      See my comment #21 on how, even with the best of planning, things don’t always work out perfectly. I do the estimated tax form every January and pay quarterly to make up the difference between what we have withheld and what we owe, but sometimes things happen late in the year that throw everything off.

  25. Thad P says 02 February 2012 at 09:33

    My number one thing would be to look again at my W-4 to see why I had so much money come to me in a refund. Letting the government have an interest free loan isn’t the best way to go.

  26. Cheryl says 02 February 2012 at 09:42

    I’ve seen people question about getting a return or refund at all, suggesting the lack of proper tax planning. I personally claim the maximum deductions, have near zero tax taken out of each pay check and I still receive money back-legally- every year. I get money back and have extra income in my check every payday What would you suggest I do to be “smarter” about my taxes?? In my case it’s because of all the deductions I’m allowed and that my DH income is not taxable.

  27. Carla says 02 February 2012 at 10:18

    No refund this year; I actually owe money for the first time ever.

    • Carla says 16 April 2015 at 10:01

      Same this year.

  28. Eileen C says 02 February 2012 at 10:31

    I’d always known that over-payment of withholding amounted to an interest-free loan to the government, but until this past year I didn’t have the mind-set to change my choices. Reading this blog helped me to do that. I used to use withholding as enforced savings, i.e.,I never would have put that money aside myself if it came in my paycheck. I would use my tax refund to pay bills, pay off a purchase I’d made with the refund in mind, or use it for a vacation.
    Supported by info from this blog, I made some changes to how I think about and manage my money. At the beginning of last year I was within $3000 of being credit-debt free. It occurred to me that I could alter my withholding, and with my new-found discipline pay off that debt in 4 months, and initiate my emergency savings fund. I considered, but couldn’t get myself to go for the Zero refund; I’d looked forward to that refund in the past – still felt like it was “found” money. So, after 4 months, I altered my withholding so that I’d get a significant but much smaller refund than in the past, and kept adding to my savings. ( as an aside, it also occurred to me last Spring that if the government ever shut down, they’d do so with all of my withheld funds in hand, and I’d get none of it back!)
    My plan was a good one. Subsequent to paying off all credit debt and getting that Emergency fund started, I got laid off. That was 7 months ago now and I’m not working yet, but I’m still in decent financial condition.
    I credit the articles and even more so, the comments posted here for helping me get to where I’m managing and not being managed by, my money. Thanks all!

  29. Kurt says 02 February 2012 at 10:31

    9. If you have an employer, submit a new W-4 and have less tax withheld in 2012! If you’re self-employed, re-look at your planned 2012 tax installments. Then revisit 1-8 to consider what to do with the increase in take-home pay you’ve given yourself.

    • Sara says 02 February 2012 at 15:14

      You should also assess your state income taxes and adjust withholding there, if appropriate, as well.

  30. Bella says 02 February 2012 at 10:37

    Great article Sarah,
    For every one chiming in about why you would keep such high withholding, poor planning and the like.
    We give an interest free loan to the government every year, and it’s a big one.
    You want to know why?
    Because the year after we got married we tripped over some special clause which meant we could no longer deduct a bunch of stuff we could previously, and we ended up owing almost as much as we usually got in a return, and then I asked the million dollar question – why didn’t we hit this limit the year we got married? And our tax person went back and realized that we did in fact owe a similar amount for the prior year as well. Yes it was a mistake, but sometimes people make mistakes, and that year REALLY sucked. We went from expecting a return of a couple percentages of our annual salery to owing about 10% of our take home. That’s a months worth of expenses! Sure we’ve made some changes to address that, but I would MUCH rather get a ‘windfall’ and pay off a debt than have a couple hundred more each month and then find out that I’m short a month’s pay in Feb. Especially with interest rates as low as they are.
    Money is more about mind than math!

  31. Michelle @ Making Sense of Cents says 02 February 2012 at 11:23

    I’m hoping to save some and put some towards debt.

  32. Keith says 02 February 2012 at 11:27

    I would change the school of thought and say don’t get a tax return. Change your deductions so you break even at the end of the year, and budget your monthly income/expenses appropriately.

  33. Shawn says 02 February 2012 at 11:58

    To everyone saying that getting a big refund is bad tax planning, etc. You seem to be forgetting one of JD’s most important personal finance rules. Do what work’s for you.

    If someone does not have the discipline to save throughout the year, then setting themselves up to get a large refund is not a bad way to “force” yourself to have a savings.

    This is the same concept as the snowball method of paying off debt.

    It doesn’t make sense by the numbers, but you should never underestimate the power of psychology.

    • Sarah Gilbert says 02 February 2012 at 12:27

      Shawn and others, yes. I think I linked to J.D.’s piece on being ok with giving the government an interest-free loan ๐Ÿ™‚ after all, I do like a lot of what the government does! Parks, for instance. Awesome. And I’m so, so happy *I* don’t have to go around collecting a percentage of all my neighbors’ incomes to pay for roads and senators! I’m thrilled the government does that for me.

      and then there’s the part about “what works for you.” Even if I have an uncharacteristically good month with savings, it seems my husband chooses that month to be particularly bad at spending. Yin and yang and all that. In a perfect world, I’d be in such a different place it’s not even worth painting the picture — but in this world, I’m very comfortable with using the “windfall” of a tax refund to pay off debt and seed my savings.

      • Courtney says 02 February 2012 at 15:14

        Interestingly it was that article that first brought me to GRS – I was arguing against purposefully getting big refunds and someone posted that link as a rebuttal.

    • PB says 02 February 2012 at 13:21

      We have had such odd things happen to us lately, like kids leaving home and returning, parents dying and leaving us things, and so on, that I have purposely had more withheld than we probably need. I would rather get something back than try to find the money later. And interest rates are so low that it’s pretty much a wash anyhow.

      This year, if we get anything back, it’s all going against our mortgage, our last major debt. We have $ 15,000 left to pay off and I want to wipe it out this year!

  34. Sara says 02 February 2012 at 12:28

    I’m curous about only 5% towards splurges. Maybe I’m bad about spending, but we usually take a couple hundred and put it towards wants – this year we’re going to get a dining room set that isn’t on its 4th owner from the 70’s, badly scratched with ugly upholstry and wobbly legs. Sure we can make do with the set we have, so I know this is a want. The rest will go to savings/debt reduction/something responsible.

    And yes, we usually aim to break even, but the last few years have had a lot of odd tax implications – buying a house, changing our daycare situation, DH getting laid off, etc.

  35. SimpleIslandLiving says 02 February 2012 at 12:41

    Usually I put all the money into savings. It goes into the e-fund, savings account – or sometimes we use the money as *play* money for investments. (I call it play money because, well, we’re playing the stock market with it).

  36. Random+Anonymous says 02 February 2012 at 13:04

    The $7500 refund is not surprising from a few key phrases:
    1)Our 3 young boys … $1000 per child refundable tax credit $3000.00
    2)Earned income tax credit based on her reduced income … refundable tax credit which may approach $5000.00
    3)Income from a war zone is tax free.

    The only change to reduce a refund would be to insure that there is no withholding from the pay earned in a war zone. I don’t know how to get the child tax credit or EIC paid to you before submitting your tax return.

    Also, I appreciate the sacrifices made by soldiers ( and their families). Thank you.

  37. bkwrm says 02 February 2012 at 13:15

    We’re going to pay cash for a house with our refund/entitlement. We live in a depressed area and can buy a habitable one for cheap. When you are living hand to mouth, having a house nobody can take away is a pretty desirable thing.

  38. Bridget says 02 February 2012 at 13:19

    I really like this post, though I won’t be following all of it =( I’m putting the bulk of my income tax return against my student loan and then the rest I’m going to use to save for a vacation to Africa in July.

    • Sara says 02 February 2012 at 15:18

      Actually, it sounds like you are doing 2 and 5 ๐Ÿ™‚ Good for you — hope you enjoy your travels!

  39. Rachel says 02 February 2012 at 13:28

    If you negotiate your debt down (or effectively cancel a portion of your debt)I would think that would result in taxable income. Granted, the tax on that income would be less than the debt cancelled so you would save some money, but not 100% of amount of debt written off. You should probably expect a 1099-c from the credit card company next year.

    • partgypsy says 02 February 2012 at 15:30

      Is that so? that doesn’t make sense to me.

    • bkwrm says 02 February 2012 at 17:53

      I think in a lot of cases it is considered income.

  40. Tyler@Debt Reckoning says 02 February 2012 at 14:01

    This is good advice. I treat the occasional refund like I do all unexpected windfalls – I put the money to use in some way that it earns a return. I add a little to a dividend stock position, or pay some down on the mortgage, or take a class or certification to build my resume (or just to expand on something I want to learn – such as mechanics, etc.).

  41. Grad Student says 02 February 2012 at 15:46

    I deposit the money in my bank account when I get it and do nothing differently afterwards.

  42. Jaime says 02 February 2012 at 15:46

    This has nothing to do with the original post, but I’m curious with how JD is doing with his war on stuff?

    JD has often talked how he’d like to move into his own “dream” apartment and start over, so I’m wondering if he’s now following that wish at his new place?

    Its been awhile since we’ve had an update on his war on stuff. =)

    • Joanna says 02 February 2012 at 17:59

      Well according to a recent post, now that he’s in his own apartment, he finds that he needed some of that stuff he took for granted. Wine opener?

  43. Jay says 02 February 2012 at 18:57

    Peoples’ first idea is always to spend it. Sitting on it is certainly better than spanking it all on stuff you wouldn’t of normally bought, but for me investing or a high interest savings account rule supreme for tax refunds.

  44. Dan says 02 February 2012 at 19:10

    I prefer to owe money, as long as I can pay it ๐Ÿ™‚

    The first year I got married, I had a *huge* refund. Like $5k. Believe it or not, I was on pins and needles waiting for that huge sum of cash. I couldn’t wait to get my W2’s fast enough (I usually run a quick check in August, so I knew I was in for a big one), I couldn’t get my other tax docs fast enough, I couldn’t file fast enough, and then there’s the nervousness that I put the wrong bank account number in and that they’d have to mail my big payout.

    What works for me? I’d prefer to owe the gman, oh, $100. I can pay him on my time (I’ve got until April 15) and there’s just no stress and hurry. And if there’s a screw-up, they have to fight me for my money, where as I have to fight them for my refund. (Or wait impatiently.)

  45. Ely says 03 February 2012 at 09:22


    It’s correct in the title, but wrong several times in the article. The RETURN is the form you send in to the IRS. The REFUND is the money you get back.
    Yes I know it’s not important, but isn’t tax time confusing enough already?

  46. Heather says 03 February 2012 at 20:38

    My and my partner’s refunds are 1) filling out our emergency fund ($1500 instead of the $1000+debt payoff that’s usually suggested, because I’m unemployed and Partner has a variable income); 2) a car maintenance issue I should have dealt with over a year ago and forgot about. And then there’s nothing left.

    That being said, we may have an emergency on the horizon (moving 3 hours away to care for a suddenly-ill parent), so it’s important to max out the EFund rather than pay off a debt like I’d prefer. The “up side?” to this emergency is that it will result in a rent-free living arrangement, so we will be able to max out the Efund again pretty quickly. So whether we move or not, our payment to debt can increase pretty significantly now, which is nice.

  47. says 05 February 2012 at 20:30

    Great tips! My tax refund should be decent, especially since this year I’m again deducting my school and work expenses. I’ll likely put half of whatever I get into savings and the other half to my highest interest rate student loan.

  48. frugalportland says 07 February 2012 at 10:40

    On the one hand, I’m psyched, thrilled, ecstatic that my tax refund will wipe out my credit card debt. On the other hand, I wish that money had been more available during the year.

  49. Kristin Turberville Haffey says 10 February 2012 at 08:56

    I just forwarded this link to my husband — it was neat to see that our planning is really close to this guide, eventhough we didn’t know about it beforehand. Thank you! (and I think it’s funny…one of my “if-can-have-a-little-left-to-get-something-for-myself” items is underware, too…lol…)

    ps — that bike is AWESOME!!!

  50. Ruth H. says 15 November 2012 at 11:10

    This is a really helpful post–thanks for sharing such valuable financial tips. I tend to go to extremes with my tax refunds: I either spend all of it to pay off a credit card bill, or I throw all caution to the winds and go on a shopping spree. Perhaps I need to find a happy medium. I love your “spend 5% on something nice” rule–what a great compromise!

  51. Nick @ Millionaires Giving Money says 16 April 2015 at 04:14

    I remember receiving a tax refund from HMRC and then investing it in stocks and shares ISA in an index fund. The stock market has done really well in the part 2 years and my money has grown. I always like to invest any windfall that I receive because I know I’ll be creating a brighter future. Great post, thanks for sharing.

  52. Shawn Hagner says 16 April 2015 at 10:07

    Spend your tax refund the same way you would your take-home salary, because that’s exactly what it is. All a refund is, is a return of excessive withholdings. If you spend your refund or think of your refund differently than salary (i.e. ‘found money’), you are deceiving yourself.

  53. Kelly says 16 April 2015 at 10:26

    On these rehashed posts, I really wish the poster would “reset” the comments. I don’t want to read through 120 comments that are 3 years old and maybe no longer relevant to see if there are any new comments.

  54. Kayla @ Femme Frugality says 17 April 2015 at 08:07

    I got a small refund but I had quite a bit saved up in case I had to pay in to taxes, so I’m using that money to do a couple of projects/repairs on my house.

  55. Jennifer Gwennifer says 17 April 2015 at 10:26

    Getting a much bigger refund than usual this year because I did not use all of my healthcare subsidy each month (I was hoping for a change in income that didn’t come.)

    Still, every year I try to follow the same formula, whether I get $100 or $1000:
    10% on something fun or frivolous
    20-30% towards extra car/accelerated debt payments
    20-30% short-term savings for larger/annual expenses
    50% straight into the emergency fund

    The two middle ones fluctuate based on my current finances.

    • Jennifer Gwennifer says 17 April 2015 at 10:28

      Whoops. That last one is supposed to be 40%. I swear I can count to 100!

    • Mystic says 24 March 2016 at 07:27

      Its very similar to my plan. 50% retirement, 15% travel fund, 15% medical/car/emergency fund, 5% gift fund, 7.5% increase cashflow in checking accounts, 5% donations fund, 2.5% making wifey happy fund.

      i manage annual budgets along these categories so its easy to distribute windfalls based on what is left in each of those for 2016/2017

  56. Jason says 17 April 2015 at 15:18

    I have two great suggestions to add to the mix. First, pay a visit to a Certified Financial Planner or an Accountant to get some professional advice on planning your finances and reducing your taxes for next year. This can pay off big time.

    The second suggestion is to spend up to 10% of your return on something special that will bring your joy and happiness throughout the year. Maybe a new pair of running shoes. A subscription to your favourite movie channel. A Netflix subscription. A โ€˜coffeeโ€™ fund where you can have one coffee each Friday for a year at your local Starbucks ($150 value). How about a new set of dishes for your kitchen ($100 value)? The possibilities are endless. By having a little treat now and all year long, you are much more likely to use the remaining portion of your tax return on debt reduction, boosting your savings, or investing in your education/career.

  57. Rail says 18 April 2015 at 09:05

    Well, lets see. Pay off bills. Put the rest(any?) left over from bills into emergency fund/savings.

  58. Fred says 19 April 2015 at 13:41

    Suggestion Number 8 is the best one. You get a double benefit: adding to your investment assets and reducing your taxes for the current year (especially if you use a regular IRA, but even a Roth IRA will help reduce your taxes a little).

  59. Nathan says 26 January 2016 at 09:28

    It’s my money I worked for it I’ll spend it how I want and to the idiots that keeps asking why are you getting a refund in the first place maybe us poor folks like getting a refund at the end of the year

  60. Kelli says 18 March 2016 at 11:45

    Good list of ideas/tips. It’s definitely wise to actually wait to have the money before you start spending! Another idea is to start a college savings account for your kid(s).

  61. Katie says 19 March 2016 at 19:25

    I originally planned on maxing out my Roth for the first time ever this year, but since I was fired from my cushy office job on March 4th, I’m not sure I’ll be able to do it. I still haven’t done my taxes yet (tomorrow-I swear!), so I don’t know how big my refund will be. Since my emergency fund is still intact, I’m thinking of throwing it all in my Roth to see how close I can get to that max $5,500 limit.

  62. Sullygirl1 says 20 March 2016 at 08:19

    We got a larger refund this year. Usually every year we pay the upcoming property taxes since they aren’t added into our mortgage but this year I saved enough throughout year to pay it without using the tax return. We also invest it back into our house and put some away in savings.

    This year we are remodeling our bathroom with return. We also paid a little towards debt we accumulated this past year.

  63. Frank Facts says 20 March 2016 at 18:16

    I saw the title of this and though, “how to SPEND a refund?” Don’t spend it, save it!!

  64. Lady FruFru says 23 March 2016 at 05:07

    Mine is going toward paying off my HELOC, one of my 2016 financial goals. I’m appalled when I see people in financial trouble getting a refund and then “rewarding themselves” by spending it on silly things. Irony.

  65. Jamie @ Medium Sized Family says 29 March 2016 at 09:45

    We typically use some of our refund to pay for one of the many large repairs that need to be done on our older home. This year we are attacking our debt.

    I don’t like the idea of getting a large refund, but hubby prefers it. So I compromise on this issue.

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