What to Do With Your Tax Refund or Bill

Tax season is officially over if you didn’t extend the deadline until October and for most, this is a sigh of relief until next year. Whether you were pleasantly surprised by a tax refund or had an “oh no” moment with getting hit with an Uncle Sam bill, we’ve got suggestions to help you handle both scenarios so that you’ll be prepared by next tax season.

If You Get a Tax Refund

Hooray, you got a refund! But if you received a LARGE tax refund though, it means you overpaid in taxes throughout the year. It might feel like an awesome bonus at tax season, but that extra money could’ve been yours instead of sitting with the government. Consider reviewing your W-4 at work and adjusting your withholding so you’re not giving out an interest-free loan this year. 

With more money in your paycheck, it means you can use it to invest, pay down debt, or cover everyday expenses. 

Now that you do have a refund though, resist the temptation to splurge. This will be a great time to build momentum with your money! Here are some smart ways to use your refund in order of importance:

1. Pay Off High-Interest Debt

If you have balances left on credit cards or personal loans with high-interest debt, you can use your tax refund money to make some extra payments or pay it off completely to reduce financial pressure and save on interest!

2. Start or Boost Your Emergency Fund

At minimum you should have 3-6 months of expenses saved in your emergency fund. You never know when you might need the money for unexpected moments like car repair, health issues, or even worse, a layoff. I personally have a year’s worth saved in a high-yield savings account.

3. Invest the Money & Give Your Retirement Some Love

Utilize some or all of your tax refund into investments like a Roth IRA or brokerage account. You can contribute $7,000 if you’re under age 50 for the 2025 IRA ($8,000 if over 50). Since you have until next year’s tax time to contribute the full $7K amount, break it up into monthly chunks so that it’s only $583 per month to make it more manageable. Compound interest is a magical thing to grow your money faster!

4. Put the Money Towards a Financial Goal

If you’ve got the above taken care of, then start putting the tax refund money into a home down payment, education for yourself, or even a travel fund. Putting your dollars into buckets will make it easier to save for the financial goals you want to achieve.

5. Treat Yourself a Little

Don’t go too crazy, but you can utilize perhaps 10% of the refund to do some guilt-free spending if you feel like you can manage it!

If You Owe Taxes

It can be stressful to owe taxes to Uncle Sam but it’s manageable with a plan. Detach from emotions (temporarily) and review the bill to double-check for errors. 

Understand WHY you owe taxes. Is it from withholdings? Freelance income? In my case, I owed over $1,000 for Federal and $600 to the state due to getting taxed on an account sign-up bonus from Wells Fargo, as well as selling off investments before closing an account (capital gains), when I should’ve rolled them directly to a new account. Lesson learned!

Here are your options if you owe taxes:

1. Pay it Off in Full if Possible

Ideally, you’d pay off the entire amount to avoid interest and penalty charges. When you owe, you typically provide your checking account information so that the IRS and state can extract the amount owed, or you can mail a check and also pay for postage.

2. Set Up a Payment Plan with the IRS

If you can’t pay off the bill in full, there are short or long-term options that you can set up with the IRS online. Short term means you can pay off the balance in 180 days or less. Long term means paying monthly until you can pay it off in full but there are set up fees depending on the payment method.

3. Tap into Emergency Funds as a Last Resort

While not ideal, you can use your emergency funds to pay off your tax bill as in some cases, it’s better than the interest-debt and penalty fees that can occur.

To help avoid owing taxes for NEXT year, review your W-4 to make sure they’re withholding enough from your paycheck for taxes. Use the IRS’ tax withholding calculator so you can easily see how your withholding is affecting your refund.

Preparing for the Year Ahead

As mentioned, double-check your W-4 to make sure your withholding is correct. Typically that’s the easiest change to make that makes a big difference.

Major life events like starting a new job with a pay raise, getting married, or having a child go to college and no longer claiming them as a dependent can also affect your tax liability.  

Revisit your budget or income tracking tools to see if you need to start setting aside money for potential tax bills. 

If you’re a small business owner or self-employed, you might have to plan for quarterly estimated tax payments during the year. Double-check with your tax accountant to help you come with the estimates if you’re unsure.

And remember, state taxes can be different from federal taxes so set reminders for different due dates if applicable!

The Money Move

Whether you’re receiving a refund or paying a tax bill, your tax outcome is all part of your overall financial picture and not a one-time event. The goal is to be intentional with your money and to be proactive with any outcome as it can change each year! 

As long as you’re adaptable, you can utilize tax season to build momentum with your money or learn lessons for the following year each time you owe. We hope these tips will help you get a better idea on what to do whenever you fall into either camp. Everyone’s tax situation is different, so be sure to check with your tax professional too!