Use Your Tax Refund To Patch Holes In Your Financial Life

What’s the best way to handle a big tax refund from Uncle Sam? Avoid one altogether.

Date: April 16, 2010

Contact: Paul Golden 303-224-3514, [email protected]

DENVER—Qualifying for a tax refund means you’ve overpaid the federal government in taxes for the previous tax year. With each paycheck, too much of your hard-earned money was withheld for federal taxes and not enough cash made it home to your wallet.

That means the federal government got an interest-free loan courtesy of you, while you had to get by on smaller-than-necessary paychecks throughout the year. To tip the scales the other way, adjust your federal tax withholding so the money taken out of your paychecks more closely matches your federal tax obligation.

On your Form W-4, you may make allowances for yourself, your spouse and your dependents. For every allowance you take, less money gets withheld for federal taxes and more money gets added to your paycheck. To ensure you withhold just the right amount, use the IRS Withholding Calculator and submit a new W-4 to your employer.

But if the government still owes you this year, here are seven tips for using your tax refund wisely.

1.     Pay down credit card debt. Is high-interest credit card debt weighing you down? Use your tax refund to pay off a nice chunk of that frightening balance. First, attack the card with the highest interest rate. If you can pay off the card in full, that’s even better. For more tips on dealing with debt, click here.

2.     Build up an emergency fund. Tuck some of that tax refund into savings. Even a modest amount—as little as $500—can help soften the blow of the typical unexpected expenses. If you already have an emergency fund, give yourself an extra boost toward reaching that three-to-six-month-living-expenses recommendation. If you have yet to establish a plan, learn how you can maximize your savings.

3.   Invest in a retirement plan. Enhance your future now by using your tax refund to invest in a tax-deferred retirement plan. If you have an Individual Retirement Account (IRA), make a one-time, sizable contribution or save your refund for a series of smaller investments over several months. But be sure you understand your annual contribution limits. If you don’t have a retirement account, learn more about them here.

4.     Prepay your mortgage or loans. For homeowners with hefty monthly mortgage payments, give yourself some breathing room by using your tax refund to pay ahead. For non-homeowners, contribute to your car loan or student loan or prepay on your insurance premium.

5.     Be good to your car and your home. Use your tax refund to help fund costly, but necessary, repairs to your home or vehicle. Replace that leaky roof or buy new tires for your car.
6.     Treat yourself. If you’ve covered all of the above, then reward yourself, but do so responsibly. Use your tax refund to fund a well-deserved vacation or buy yourself that flat-screen television or mp3 player you’ve been eyeing. Just be sure to maintain your fiscally savvy ways by finding the best deal, and click here for tips on making a major purchase. Then, enjoy!
7.     Elect for the windfall each year. If you’re more likely to squander the extra money in your paycheck each month, and would rather receive a lump sum each tax season to put toward a financial goal, elect for the refund. But plan carefully to make smart decisions with the windfall to reduce debt, save for the future, or increase the value of your home.
Whether you’re an early-bird filer or an April procrastinator, there’s a lot to be aware of this tax season. Changes in your life and alterations to the tax laws will affect how you file. Stay up-to-date by visiting us each week throughout March. Visit NEFE’s tax series at


  • Paul Golden

    Media Relations Director

    Direct: 303-224-3514
    Cell: 303-918-3620
    [email protected]

  • Patricia (Pat) Seaman

    Senior Director of Marketing and Communications

    Direct: 303-224-3538
    [email protected]