The 4 Biggest Mistakes People Make With Their Tax Refunds

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Got a chunk of money from Uncle Sam coming your way this spring? Read on to learn what not to do with it. [[{“value”:”

Ah, tax time — it’s such fun to sit down with an accountant or tax-filing software and see if you underpaid or overpaid the government (which already knows your tax liability). You might be excited to see that you’re owed a refund on what you paid in 2023. But before you start making plans for that money, take a beat and check out a few mistakes you should avoid in the process.

1. Thinking that it’s “free money”

The way some folks celebrate getting a tax refund, you’d think it was a surprise windfall being given to them as a gift. I’m sorry to burst your bubble, but a tax refund isn’t like a birthday check from your grandmother — it’s your money, and the government held onto it for a while because you overpaid your taxes. Now it’s being returned to you, without interest.

I recognize that a tax refund has the potential to give you more financial breathing room, and even a bit of extra cash to spend, if your needs are met otherwise. But keep in mind that this is your money, and if you’d had access to it during 2023, it might’ve helped you out of a jam then.

Say you’re getting back $2,400. That represents $200 per month — what could you have done with $200 extra per month last year? Maybe you could have paid down some high-interest debt (more on that below), not sweated your high grocery bills as much, or padded your emergency fund.

2. Paying down low-interest debt

So you’ve decided to pay off some debt with your tax refund. This is a great idea — owing less money to your creditors is an excellent feeling, and can save you quite a bit. (In fact, the average credit card APR was 21.47% as of November 2023.)

But what you don’t want to do with your tax refund is use it to pay down debt that isn’t costing you a ton of money in interest — unless, of course, it is the only debt you have and you don’t have a better use for the money. (May I recommend adding it to your emergency fund?)

If you’ve got mortgage debt that isn’t costing you a ton in interest (say, you bought or refinanced a home in 2020 or 2021 and are sitting on a sweet 3% mortgage rate), putting your tax refund toward paying extra on it isn’t really the best use of that money. This is especially true if you also have higher-interest debt, like credit card debt. Paying off debt with a tax refund is smart, but apply that money where it’ll do the most good — like saving you 21% interest.

3. Blowing it on a purchase with expensive continuing costs

Considering buying a new car with your tax refund? (How big is that tax refund, anyway?) You might want to think twice. As anyone who’s ever received a big repair bill from their auto mechanic can tell you, making a big purchase is often just the beginning. Say you use your tax refund as a down payment on a new vehicle. Can you reliably afford the ongoing monthly payments for the car? How about auto insurance premiums?

Don’t make the mistake of committing to a large ongoing expense made possible by a chunk of money from your tax refund. If you have already figured the new expenses into your budget and were merely waiting for sufficient money to put down on the purchase, that’s likely fine. But before committing to any kind of big addition to your budget, make sure it actually fits into your budget long term.

4. Getting a refund at all

Honestly, getting a big tax refund at all could also be a mistake — unpopular opinion, I know. But remember what I said earlier, about how a tax refund is your money that you should’ve had access to during 2023 from your regular paychecks? If the money you’re receiving from Uncle Sam could’ve really helped you out last year, consider making a change to impact your 2024 taxes.

The IRS has a withholding estimator that can help you see if you’re having too much money taken out of your paychecks. You can update your withholding on your W-4 form with your company’s human resources department. It can be tricky to get the math just right, and you may end up owing a little next year, or still getting a small refund. Either way, you’ll have access to more of your hard-earned cash during the year, and that might make a difference in how comfortable you feel paying bills and managing your personal finances.

A tax refund can do a lot of good for you. Just be careful not to squander this opportunity or create a bigger headache for yourself when using it.

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