Tax season is just around the corner, and Tax Day is coming on April 15, 2025. If you’re one of the 62% of taxpayers who gets a refund, you may be thinking about what to do with that unexpected money. Whether it’s a minor windfall or a substantial check, an IRS refund can be a golden opportunity to improve your financial well-being. Here’s what it means to get an unexpected tax refund and what smart ways you can spend it.
What Is a Tax Refund?
A tax refund is when you’ve paid too much in taxes throughout the year, and the government pays you back. Because most refunds are from federal taxes, the average refund reaches $2,948 in April of that year. You may qualify for a refund if you’re a freelancer who has paid in too much of your estimated taxes to stave off a surprise bill. Others, though, only realize they’re owed a refund after filing their return and learning the IRS owes them money.
Why You May Receive a Surprise Refund
A few reasons you could get an unexpected tax refund:
- W-4 Mistakes: Your employer will use the W-4 in order to know how much tax to withhold from your paycheck. If it’s not filled out properly or updated after life changes (such as having a child), an excess may be withheld, leading to a refund.
- Overpaid Estimated Taxes: Self-employed taxpayers often overpay quarterly taxes to play it safe, particularly if they don’t also deduct business expenses.
- Tax credits: Refundable credits, such as the Earned Income Tax Credit (EITC) or Additional Child Tax Credit, can increase your refund above the expected amount.
- Recovery Rebate Credit: If you didn’t get a 2021 stimulus payment, the IRS could file one in 2024 or 2025 for you as part of your refund.
- Audit Adjustments: Believe it or not, an IRS audit can lead to a refund if the errors in your original return are remedied to your advantage.
What to Do With Your Refund
The last thing you want to do is go on a spending spree just because you received an unexpected windfall, though officials like Melissa Joy, CFP, advise finding a balance. Here are five smart options:
- Pay Off High-Interest Debt: Eliminate credit card balances or personal loans with high interest rates. Clearing these can relieve your financial stress quickly.
- Create an Emergency Fund: Slip cash into a savings account to cover unexpected costs such as car repairs. It’s insurance against future debt.
- Invest for Your Future: You can get tax breaks now and in the future by putting money in a Roth or traditional IRA (up to $7,000 in 2025).
- Use less to lessen student debt: Outlaw both those loans or fund a 529 plan to get your kids out of such…
- INDULGE A BIT: Once you’ve paid for your priorities, enjoy a small gift—maybe a trip or a course—but don’t go crazy.
The Bottom Line
Having an unexpected IRS refund may seem like a bonus, but it’s actually an indication that you’ve overpaid the government rather than using that money yourself over the year. Be intentional: pay off debt, set aside savings for emergencies, and invest in your future. And yes, it’s fine to indulge in a modest treat—but don’t overdo it. Tax Day 2025 is just around the corner; it’s time to plan ahead.