Taxpayers Are Using Their Tax Refunds in Surprising Ways. Here's Why That's a Good Thing

Almost half of US taxpayers are planning to pay down nagging debt with their tax return, a new study finds.

Danni Santana Editor
Danni Santana has spent seven years as an editor and business journalist covering industries like sports, retail, restaurants, and now personal finance. Most recently he worked as a retail editor at Business Insider. He is a graduate of the Craig Newmark Graduate School of Journalism at CUNY. His biggest loves outside of the newsroom include, running, cooking, playing video games and collecting sneakers.
Danni Santana
4 min read
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Tackling debt and saving for a rainy day are the top priorities of Americans receiving tax refunds this year, according to a new study from Santander US.

The bank surveyed middle-income Americans about their tax refund plan this year. Respondents were able to choose multiple options from a list, with a majority saying that paying off debt and saving their refunds are top priorities, at 42% each. Investing (16%) was another option chosen by those surveyed.

Using a windfall like a tax refund to pay off debt or pad an emergency fund should be a priority for those looking to improve their financial health, according to financial activist Dasha Kennedy, creator of The Broke Black Girl. "These areas directly address key concerns such as reducing financial stress, building long-term security, and achieving greater financial freedom," she said.

But Americans plan on spending at least some of their refunds, too. The survey found that 14% of people surveyed will be making a large purchase, like a car, home improvement project, large appliance or vacation. 

Due to stubbornly high inflation, many families have put off these purchases over the past year. Two-thirds of survey respondents have made cuts to their household budgets because of the increased cost of living, with vacations, vehicles and home improvement projects topping the list of delayed purchases. 

Balancing responsible money management with enjoyment is key to creating a healthy mindset, Kennedy said.

"Allowing yourself some discretionary spending on things you want can help maintain motivation and prevent burnout from demanding financial restraints," she said. 

Santander's study surveyed over 2,000 Americans with a household income between $50,000 and $148,000.

What are the best options for saving my tax refund?

If you're among those looking to save part of your tax refund this year, there are plenty of suitable options where you can stash your cash. 

High-yield savings account

A high-yield savings account can help grow your money faster than a standard savings account and beat inflation. Ally Bank, Capital One and Synchrony Bank currently offer annual percentage yields of 4.25% or higher. Some banks, like EverBank, offer over 5% interest rates for you to bank with them. 

Be sure to research minimum balance requirements and other potential fees you'll want to avoid before opening an account. 

Certificate of deposit

If you don't need immediate access to your tax refund, consider opening a certificate of deposit. Although rates have dropped from their highs in 2023, top accounts still offer APYs as high as 5.5%. But unlike HYSA rates, which have variable APYs, CDs let you lock in your rate with a local credit union or bank for the duration of the term. 

What else can I do with my tax refund?

There are plenty of other smart ways to use your tax refund, some of which can offer some long-term financial benefits. But you'll want to understand the tax implications of these accounts so you don't face a tax bill next year. Here are a few options.

Retirement account

We all plan to retire someday, so investing your tax refund in an individual retirement plan like a 401(k) or IRA is a smart long-term move. You can contribute up to $23,000 in your 401(k) and $7,000 in a traditional or Roth IRA for 2024. If you're 50 or older, you can contribute up to $8,000 in your IRA.

529 plan

You can also invest to help pay for your child's future college costs through a state-sponsored 529 plan. There are no annual contribution limits for a 529 plan, and contributions grow tax-free.

However, the funds have to be used for educational expenses, which vary by state and can include vocational or trade schools. 

Tax-advantaged savings vehicles

Also consider contributing to a health savings account or flexible spending account. HSAs and FSAs are tax-advantaged savings accounts that help cover your medical costs during the year. 

The 2024 HSA contribution limit is $4,150 for individuals and $8,300 for families. Those 55 and older can also contribute an additional $1,000 as a catch-up contribution. All unused HSA funds automatically roll over to the next year. But If you cash out money from your HSA for a nonmedical reason you will pay income taxes on the money, along with a 20% tax penalty. 

When it comes to an FSA, you can contribute up to $3,200 this year. But unlike an HSA, you may forfeit a portion of the money you don't use during the year. That's because the maximum carryover amount to 2025 for an FSA is $640. You're also not allowed to cash out your contributions at any time, barring a medical expense. 

Once you have your financial needs covered, don't forget to reward yourself. Book a much-needed getaway or buy that new set of headphones you've been eyeing. Thinking of starting a side hustle? Your tax refund can help pay for classes or materials to get you started.