Very few people enjoy filing taxes – we at AZTEC Financial Group sure don't – but you know what we do enjoy?

The long-anticipated tax return. It's like free money (as long as we ignore the fact that the money was ours to begin with – why take the fun out of it?). You may wonder, though: now that I have my tax return, what do I do with it?

That's a smart question to ask yourself, because some options are more financially advantageous than others. 

Use Your Tax Return to Pay Down High-Interest Debt

The first priority to tackle with your tax return is any high-interest debt you may have, such as credit card bills and auto loans – basically, any debt that's above the average interest rate of mortgages and student loans. Since the average APR for credit card accounts is 22.80%, and auto loans can range from 5-20%, depending on the borrower's credit score, it's a real incentive to prioritize paying down these debts first. 

If you have more debt than your tax refund can cover, you have a few different options: 

The snowball method, where you tackle your smallest debts first. It's a similar principle to putting easy tasks on your to-do list to check off; when you do, the feeling of accomplishment can give you a motivational boost to keep going.

When that debt is gone, you then take the amount you'd been paying toward it and add it onto the minimum of the next smallest balance. Like a snowball rolling down the hill, it keeps growing. 

The avalanche method, where you focus on paying off the account with the highest interest rate first (without neglecting to pay the minimums of the other accounts). This way, you're saving yourself from the ongoing hefty interest this account demands.

Whichever way you decide to tackle the problem, using the windfall of a tax return may help you work toward freedom from debt.

Put Your Tax Return Toward an Emergency Fund

With a plan to tackle your debt, the next priority is to use your tax return to build up some emergency savings. Whether you have one started, or haven't had the money to put aside, contributing toward an emergency fund may be a wise choice.

An emergency fund is just what it sounds like: easily accessible money saved aside for unexpected costs. That could be anything from a job loss to a car repair to an unplanned medical bill. 

How much you save depends on your personal circumstances, but it's recommended to save 3-6 months of living expenses. Although it's highly unlikely you'll receive that much of a tax return – the 2024 average amount was $3004 – it's still a decent sum of money to get the ball rolling. 

Plus, with money saved, you wouldn't need to put unexpected expenses on credit cards – helping you to avoid more high interest debt.

Make a Lump-Sum Payment With Your Return

If you don't have high-interest debt and you have money put away for emergencies, another option is to use your tax return to make a lump-sum payment toward your mortgage, student loan, or other large debt (as long as your agreement doesn't have any penalties for prepayment).

Let's talk about a mortgage in this situation. Paying a lump-sum toward your mortgage has two potential benefits: a shorter time until the debt is paid off or lower monthly payments. 

A lender would usually put the funds toward your principal, so your monthly payment wouldn't go down, but you'd pay off the loan sooner. Another option is to recast your mortgage, which would mean continuing to pay for your agreed period of time, but with a smaller monthly payment. Although it sounds similar to refinancing your mortgage, there are substantial differences. Fees are usually much lower than refinancing, and you can keep your original interest rate – which is great if you already have a low one.

Similar principles apply with other loan types, so whichever you have, a lump-sum payment may have great benefits.

Contribute Toward Retirement With Your Tax Refund

With high interest debt and emergency savings accounted for, the next option is to put your tax refund toward retirement savings. This may be a great choice for people who can't afford to put a set amount away each month, but still want to save up for their future. 

If you have an employer-matched 401(k), there's a way to maximize your contributions: increase the percentage to the maximum your employer will match, and then use your tax refund for living expenses. This way, you're not only putting your tax return into your 401(k), but you're also taking advantage of the free money offered to you. 

Another option is to put your tax return toward a Roth IRA. You'll pay taxes on the amount you contribute, but then the funds can grow in your account tax-free. Then when retirement comes and you start taking money out (both the original contributions and the earnings from compound interest!), you won't have to pay a penny of taxes on it.

And remember, if you're over 50, you can make catch-up contributions of an extra $1000, totaling $8000 for the year. Could your tax return provide the extra $1000?

Use Your Tax Return to Invest in Your Children's Education

Putting your tax return toward your children's – or grandchildren's – future education may be a worthwhile choice.  Did you know that college costs have increased 169% since 1980, but wages for 22-27 year-olds have only gone up 19%? Financial aid can help some, but the weight of student loans can still be burdensome to young adults just entering the work force. This calculator can help estimate the cost of future higher education. 

If you have little ones – or even not-so-little ones – a 529 plan or Coverdell Education Savings Account (ESA)  may be a good idea.

Going into the nitty gritty of the two options would require an entire blog post, so I'll summarize simply: they are both education-centered savings accounts that are funded post-tax, and can be used toward private and public college, trade schools, school supplies, and even K-12 schooling. The main differences are that ESAs have an annual $2000 contribution limit per child, while 529s don't have a limit, and ESAs allow you to choose the investment vehicle, while 529s have specific plans to choose from.

A financial professional can help you figure out which option is better for your family. 

Splurge a Little With Your Tax Return

Finally, the fun part: using your tax return for some indulgence. There's nothing wrong with using your hard-earned money to treat yourself, within moderation. As a financially responsible person, you're probably careful about your unnecessary spending. You may turn down day-to-day splurges that other people enjoy, such as eating out all the time instead of cooking at home, or buying something just because they like it, not because they need it. You've earned it: enjoy the fruits of your labor. 

Using Your Tax Return Wisely

These suggestions on how to make use of your tax return aren't hard and fast rules; nobody has the exact same circumstances. Still, taking care of immediate needs like debt and emergency savings may make it possible to prioritize longer-term goals down the road, like saving for retirement and secondary education. You don't have to choose just one of these options, either; this article is like a buffet, where you can pick and choose as you see fit. Maybe you want to put half of your return toward credit card debt, use a quarter as a lump-sum for your car loan, and keep the final quarter for a weekend trip away. It's completely up to you! 

If you'd like more guidance on maximizing the benefits of your tax return, feel free to reach out. Eric would be happy to help you figure out the choice that best suites your personal circumstances.