How Clients Can Use Their Tax Refunds

Age-in-place home projects, medical bills and grandchildren’s 529 plans are just a few possibilities.

By Assunta McLane
Assunta McLane
Assunta McLane

It may feel like 2023 just started and here we are into another tax season! Yet April Tax Day seems to creep up on us every year.  Maybe your clients filed early?  Maybe they are racing for the approaching tax deadline or, perhaps, even filing for an extension. Either way, now is the time to begin helping them think about how they might use their tax refunds.

Here are a few options to consider:

Pay yourself first

To some, a tax refund is like finding that $100 bill under your mattress — you never expected to have this money, but now you’re excited! Instead of buying something new, this is a good opportunity to use the refund to put a little extra towards an emergency fund.

We typically suggest that clients work towards accumulating enough to cover three to six months of living expenses.  We don’t typically recommend commingling regular savings with emergency savings. It would be wise to set up a separate savings account, earmarked specifically for emergency spending only.

Your client might also consider using a portion of the refund to reduce debt. Do they have credit card debt or a home equity line that they’ve been working to pay down? This is a great opportunity to make an extra payment and benefit from owing less interest. We recommend paying down debt with the highest interest rate first.

Now what if there’s a little extra left over? You may recommend that they contribute to a traditional or Roth IRA. If your client still has earned income, contributing to an IRA is a great way to save for retirement. If they are collecting a pension or required minimum distributions and paying estimated taxes, they may have over calculated how much the owe.

Time for an update

Like many people, your clients have probably been spending more time at home the last couple of years. Maybe HGTV’s Dream Home Makeover has your client imagining bigger plans for their home, even if their budget is telling them differently. A tax refund can create the opportunity to open an account earmarked only for dream home projects. This could be the “down-payment” they need to get more savings started.

If the funds are in a separate account, they’re less likely to use them for something else and can direct regular deposits into this account. Once they have built up the account, they’ll be ready to get started on that project. This same strategy works great not only for dream-home projects but for other longer-term goals and wishes that your client might have.

Invest for the future

If your client already has set funds aside for an emergency, paid down debt, and tackled age-in-place home projects, it may be time to set up or add to dedicated investment accounts. They can establish these accounts to benefit their children or grandchildren. These types of accounts may include 529 plans, trusts with Crummey power, Uniform Transfer to Minor Accounts (UTMA) or a simple custodial account, to name a few.

However, if your client doesn’t want to set up separate accounts, they may choose to make direct gifts. The 2023 gift tax exclusion is $17,000. This means individuals can gift up to this amount to as many people as they want in 2023 without having to worry about any federal gift taxes.

These are great ways to help the next generation get started and a great opportunity to start educating them on the importance of saving. Extra savings invested for the long-term can potentially double or even triple in 10, 15 or 20 years.  This could equate to significant savings.

Whichever way your clients choose to use their refund from Uncle Sam, be sure to encourage them to set aside a small amount to also enjoy themselves. The most successful savings plans build for the future without leaving anyone feeling deprived.

Assunta “Susie” McLane, CFP, is a managing director and senior wealth advisor with Summit Place Financial Advisors LLC.  She can be reached at or 908-517-5884.


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