- Pay off credit card debt. Paying a large amount of your debt on a high-interest rate credit card helps you in several ways. You will reduce the amount of interest penalties, but also decrease the number of monthly payments that you will have to make. Paying down your debt will also help you improve your credit score gradually. If you have several cards, be sure to first pay off the card with the highest APR.
- Pay off other high-interest debt, such as payday loans or other loans in collection. Many people who have payday loans can't afford to pay them, and fees roll over until interest payments cost much more than the loan. It is also a good time to pay off late bills and get credit collectors off your back.
- Build up savings. This is a good time to build up your emergency savings or save for a car, the down payment on a house or even an eventual vacation. Set up a separate savings account for your refund and add to it when you get extra money from gifts, bonuses and next year's refund. An emergency fund will keep you from using a credit card during a crisis and protect you from going into debt from unexpected expenses.
- Make a contribution to your IRA. If you have low to moderate income, you could be eligible for a tax credit or a tax deduction. With a $2,000 IRA contribution, you could get $1,300 in tax refunds.
- Save for college in a 529 College Savings Plan. The contributions can grow, and there is no tax when the money is withdrawn for education expenses. You may get a deduction on your state income tax if you use your own state's savings plan.
- If you have borrowed from your 401(k) loan, use your refund to pay it back. If you leave a job, these unpaid loans are taxable when you leave your job.
- If all other debts are paid, make an extra payment on your mortgage. This additional payment may save thousands of dollars in interest and pay off your mortgage faster.
How to Get the Most Out of Your Tax Refund
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