5 Smart Ways to Spend Your Tax Refund
- Tax refunds are a great chance to improve your financial health.
- Save some cash in an emergency fund for stability.
- Pay off your smallest debt to gain some momentum on your debt-free journey.
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So you’ve got a tax refund and want to make the most of it. After all, it can be an annual opportunity to make a quick improvement to your financial future. Below, we explore some smart ways to allocate your tax refund.
1. Pad Your Emergency Fund
One of the best things you can do to stabilize your finances is to put some of your tax refund into your emergency fund. In other words, pad your savings account. It’s rare to hear anyone say they have too much money in the bank, so just keep working at it.
Your first goal should be $1,000.
Your next goal should be enough money to pay all of your bills for a month with no income at all.
Then, save enough to live on for three months.
The ultimate goal is about six months’ worth of expenses.
Setting aside at least some of your tax refund in emergency savings could help you cover basic living expenses in case of a job loss or a medical emergency.
2. Spend Your Refund to Pay Down Debt
Pay off your smallest debt or put a big payment toward the one with the highest interest rate. Reducing your debt is another smart way to spend your tax refund. Even if you make a ton of money, having debt is like owning a leaky ship. Even if you’re paddling hard, you’re taking on a little bit of water all the time. It slows you down and puts you at risk.
To make headway on your debt, get organized. Use a spreadsheet or piece of paper to list out all of your debts, including each outstanding balance, minimum payment, and interest rate. Then, reorder the debt according to the highest interest rate or the lowest outstanding balance.
If you start by paying off the debt with the highest interest rate, you’re using the debt avalanche method. If you start with the smallest balance, you’re doing a debt snowball. In either scenario, take a look at your tax refund amount and figure out how it could impact your debt balance.
3. Invest in Your Retirement
You could use your tax refund to invest in your retirement. Even if you regularly contribute to a 401(k), you could contribute some extra money through an individual retirement account or a brokerage account.
Use your tax refund to open a Roth IRA. That’s a retirement account that offers tax-free growth and tax-free withdrawals after you reach retirement age. In order to fully contribute to a Roth IRA, you must make less than $150,000 as a single earner (or under $236,000 for couples). If you earn more, you can make partial contributions.
4. Apply the 80/20 Rule to Your Tax Refund
You’re not a machine—it may feel too harsh to feel you have to spend your entire tax refund windfall on debt or retirement.
In that case, why not use 80% of your tax refund on a financial goal and 20% on something fun? You can tweak the percentages to better fit your circumstances. Even putting 70% toward debt or retirement savings could make a difference.
You can use the 80/20 rule for any extra income that comes your way. This method combines discipline and indulgence, but the focus remains on your larger financial goals.
You might use that 80% to:
Pay down high-interest debt
Pay off student loans
Build a down payment fund
Start an emergency fund
Save for a car
No matter the size of your tax refund, it can be rewarding to put most of it toward a financial goal and spend a small portion on yourself.
5. Pay Yourself the Refund Over Time
Here’s a smart and creative way to spend your tax refund: Pay yourself small amounts of the refund over time. This increases your regular monthly income so you have more money to cover your expenses. If you don’t have any immediate need for your full refund, then the extra monthly income could be a bonus to your budget.
For example, let’s say you get a $4,000 tax refund. Instead of spending it all on a certain goal or socking it all away, deposit the money (or 80%) into a separate savings account and pay yourself regular distributions into your checking account. You could pay yourself roughly $300 per month over the next 12 months with a $4,000 tax refund.
Debt relief stats and trends
We looked at a sample of data from Freedom Debt Relief of people seeking a debt relief program during June 2025. The data uncovers various trends and statistics about people seeking debt help.
Credit utilization and debt relief
How are people using their credit before seeking help? Credit utilization measures how much of a credit line is being used. For example, if you have a credit line of $10,000 and your balance is $3,000, that is a credit utilization of 30%. High credit utilization often signals financial stress. We have looked at people who are seeking debt relief and their credit utilization. (Low credit utilization is 30% or less, medium is between 31% and 50%, high is between 51% and 75%, very high is between 76% to 100%, and over-utilized over 100%). In June 2025, people seeking debt relief had an average of 75% credit utilization.
Here are some interesting numbers:
| Credit utilization bucket | Percent of debt relief seekers |
|---|---|
| Over utilized | 30% |
| Very high | 32% |
| High | 19% |
| Medium | 10% |
| Low | 9% |
The statistics refer to people who had a credit card balance greater than $0.
You don't have to have high credit utilization to look for a debt relief solution. There are a number of solutions for people, whether they have maxed out their credit cards or still have a significant part available.
Credit card debt - average debt by selected states.
According to the 2023 Federal Reserve Survey of Consumer Finances (SCF) the average credit card debt for those with a balance was $6,021. The percentage of families with credit card debt was 45%. (Note: It used 2022 data).
Unsurprisingly, the level of credit card debt among those seeking debt relief was much higher. According to June 2025 data, 88% of the debt relief seekers had a credit card balance. The average credit card balance was $16,425.
Here's a quick look at the top five states based on average credit card balance.
| State | Average credit card balance | Average # of open credit card tradelines | Average credit limit | Average Credit Utilization |
|---|---|---|---|---|
| Ohio | $15,683 | 7 | $24,102 | 84% |
| District of Columbia | $17,396 | 9 | $28,791 | 82% |
| Alaska | $20,496 | 9 | $27,261 | 80% |
| Oklahoma | $15,035 | 8 | $25,731 | 78% |
| Indiana | $14,039 | 8 | $26,156 | 78% |
The statistics are based on all debt relief seekers with a credit card balance over $0.
Are you starting to navigate your finances? Or planning for your retirement? These insights can help you make informed choices. They can help you work toward financial stability and security.
Manage Your Finances Better
Understanding your debt situation is crucial. It could be high credit use, many tradelines, or a low FICO score. The right debt relief can help you manage your money. Begin your journey to financial stability by taking the first step.
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Author Information
Written by
Cole Tretheway
Cole is a freelance writer. He’s written hundreds of useful articles on money for personal finance publications like The Motley Fool Money. He breaks down complicated topics, like how credit cards work and which brokerage apps are the best, so that they’re easy to understand.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
Why is severance pay taxed at a higher rate than regular earnings?
Severance pay is subject to the same taxes as your ordinary income: federal, state, and FICA (which covers the employee’s share of Social Security and Medicare).
For tax purposes, severance pay may be considered supplemental income in some cases.The IRS requires employers to withhold 22% of severance pay for taxes if the payments are classified as supplemental income. If you chose a lower rate for your regular withholding, it could look like severance pay is taxed at a higher rate even though in the end you don't pay more tax on it.
If the severance pay is a lump sum, it might be subject to higher withholding because the payment reflects a higher tax bracket than your regular paychecks. Again, you won't be taxed at a higher rate unless the additional income pushes you into a higher tax bracket.
Should I request severance over several payments instead of a lump sum to save on taxes?
First, unless your income at year-end is higher than the previous years’ income, you won't paya higher tax rate on your severance pay.
However, a large severance payment could push you into a higher tax bracket. If you're nearing the end of the year and can request severance over several payments paid in different years, you may be able to avoid this.
Receiving a lump sum severance payment can also increase the percentage of your severance that the employer withholds for taxes. If your employer agrees, you could reduce this amount by taking your severance as a series of payments.
Keep in mind that receiving regular severance payments from your employer might delay your eligibility for unemployment compensation in some states.
Will I owe extra taxes if I settle my debt?
If you're successful with your debt settlement attempts, there's a chance you may owe taxes on the amount of debt that's forgiven. There are nuances here, though, so consult your tax professional to get an accurate idea of what taxes you might owe after debt settlement.
Debt Solutions
Debt Solutions
