What to do with your tax refund: 7 smart moves

If you're wondering what to do with your income tax refund, you're not alone. Without a strategy, it's easy to fall into impulse purchases and overspending. The good news is, when you're intentional with your plans, your refund can be a chance to make real progress toward your financial goals. Explore seven smart moves to consider when deciding what to do with a tax refund.

1. Pay down debt

According to the IRS, the average refund in 2025 was $3,116, which can make a solid dent in your debt by helping you pay off your balances early and save on interest. Most lenders don't charge a penalty for early loan repayment but be sure any extra payments you make are applied to the loan principal and not the next payment due.

When paying down your debt, you'll typically want to start with your credit cards that have the highest interest rate. For example, if you have a balance on a credit card with a 28% interest rate, focus on paying that off first. Then move to the card with the next highest interest rate, such as your credit card at 20%. When your cards with the highest interest rates are paid off, focus on your low-interest credit card balances.

If you have student loans, even just one extra payment can reduce the principal and shorten the loan repayment time, which can ease your finances and improve your credit health.

2. Build or replenish an emergency fund

An emergency fund is a financial cushion for when life takes an unexpected turn. It's money you set aside for a job loss, medical bills, car repairs and other surprise expenses. It helps you avoid turning to high-interest debt, like payday and title loans, when you need some quick cash.

Consider using your tax refund to build or replenish your emergency fund. Aim for three to six months of living expenses in a high-yield savings account or money market account. If that's not possible, start with what you have and work on growing your balance over time.

Once you've used your tax refund to establish your emergency savings, you can use tools like Citizens Savings Tracker®² to automate your contributions by scheduling monthly transfers from your checking account to your savings account.

3. Invest for the future

Investing some or all of your tax refund can help for future needs, like retirement savings. The sooner you start investing in a Roth IRA, for example, the longer your retirement accounts could potentially grow.

A 529 plan is an investment account designed to help you save for educational expenses. The money grows tax free, and withdrawals are also tax free as long as they're used for qualified education expenses, which are determined by the IRS. Consult your tax advisor if you have questions about qualifying expenses.

529 plan funds can typically be used for:

• College tuition and fees
• Room and board
• Books and supplies
• Trade school or vocational programs
• Up to $20,000 per year for K–12 tuition
• Up to $10,000 total toward student loan repayment

If you set up a 529 plan for your child, you retain full control of it even after they turn 18. You can also transfer the funds to another child if needed. Talk to your financial advisor to determine if a 529 makes sense for you.

4. Save toward big goals

Your tax refund can help you make real progress toward your goals. Maybe you're saving for a home, a new car, an upcoming wedding or a much-needed vacation. Seeing your savings account grow with a lump sum deposit can help you stay motivated to continue growing your savings.

Just remember to plan big purchases wisely. Your tax return isn't free money. You worked hard for it and spending it on an impulse purchase or something that's overpriced can lead to regret later. Using it for something you really need is a smarter move.

5. Make smart home improvements

Home improvements can make your space more comfortable, and the right upgrades may even increase the value of your home or reduce future maintenance costs. Consider using your tax refund to make essential repairs or upgrades.

Energy-efficient upgrades can save money by lowering your utility bills. Consider adding insulation or installing a smart thermostat. This may also be a good time to replace an aging HVAC system or water heater. Newer units are typically more efficient and are also less likely to break down.

6. Give back or treat yourself responsibly

Many nonprofits do essential work in the communities they serve, and they rely on donations to cover their expenses. They provide housing, medical care and groceries and meals to families in need.

Consider making a charitable donation after covering your essentials. Before you give, ensure the charity is legitimate and confirm you understand how it will use the funds you donate. Some donations are even tax-deductible when you're filing your income tax return for next year's tax season.

7. Split your refund

If your tax refund is more than you currently need, consider splitting it. For example, you could direct part of it to your checking account for everyday expenses. And then you could add the remainder to your savings account to help you work toward a down payment on a home or another goal.

The IRS allows you to split your refund into multiple accounts, which makes it easy to balance short-term needs and long-term goals.

Get ready for your tax refund with Citizens Paid Early®

Having a plan for your hard-earned money is always smart — your tax refund is no exception. Before you spend it, consider your needs and goals and prioritize them. Putting your refund toward what's most important can help you budget more effectively and reach your goals sooner.

With a Citizens bank account and Citizens Paid Early®¹, you could get your tax return up to two days early using direct deposit to help you pay down debt, invest for the future, treat yourself or take care of an urgent need right away. Explore checking account options to find the one that best fits your needs, then set up direct deposit so you're ready when your refund arrives.