New tax law driving higher refunds—and smart ways to use yours

As the tax filing deadline draws closer, taxpayers receiving refunds this year may be seeking some guidance on where to spend, or how to utilize those funds.

As of March 6, 2026, roughly 60 million taxpayers have filed their income taxes, according to IRS figures. The average refund to date is $3,676. Higher refunds are largely being driven by the new tax law, which, for example, introduced new deductions on tips and overtime.

A recent survey of some 2,000 taxpayers found that 57% of respondents plan to spend their refund on essential items like groceries, rent and utilities, credit card debt, savings and home repairs. About 8% plan to spend their refund on luxury items. [1] (see endnote)

Receiving extra cash can create an opportunity to contribute to retirement savings or other priority saving goals. Investors may want to check in with an advisor to determine the best way to use the funds.

Here are some ideas to consider for those saving their tax refund.

Pay off debt

According to the Federal Reserve, in January, consumer credit increased at a seasonally adjusted annual rate of 1.9%, in line with historical averages. Revolving credit (i.e. credit cards) increased at an annual rate of 4.3%, coming down from last year’s high, while non-revolving credit (i.e. student loans and car loans) increased at an annual rate of 1.1%. With interest rates remaining high, carrying balances have become increasingly expensive. In today’s “higher‑for‑longer” rate environment, paying down debt can offer a meaningful, risk‑free return by reducing the impact of rising borrowing costs. Depending on the investor’s situation, this could mean reducing credit card or student loan debt

Add to an emergency fund

Most households recognize the importance of emergency savings.

Still, it is not always easy to save. In a Federal Reserve survey (most recent available data as of 2024), 63% of adults said they could cover a possible $400 emergency expense with cash or cash equivalent. Still, 37% said they would not have the cash available and said they would pay by borrowing or selling something or they would not have been able to cover the expense.

Unexpected medical expenses can also present challenges. The report found that 23% of adults had major, unexpected medical expenses in the prior 12 months. The median amount of the debt was between $1,000 and $1,999. Among them, 17% said the debt was for their own medical care or that of a family member.

Saving money in an emergency fund or rainy day fund is an important part of a financial plan. Opinions vary on how much people should save in their emergency fund, but the assets should cover basic expenses such as rent or mortgage and other regular payments, as well as extra funds for unexpected expenses including car repairs or medical costs. Some investors try to save enough to cover three to six months of expenses. A professional advisor can help set a goal for this account, depending on the individual’s financial situation and ability to save.

The Federal Reserve’s 2024 survey found 55% of adults said they had set aside money to cover three months’ worth of expenses in an emergency savings fund.

Open a Roth IRA

Contributions to a Roth IRA are not tax-deductible, but appreciation, as well as withdrawals in retirement, are tax free if requirements are met. Roth IRA accounts can also help savers establish tax-diversification among retirement assets, which can be used as a tax-smart strategy in retirement. Some investors may not realize that a Roth IRA can be used to help save for a child’s college costs, and if the money is used for education, the 10% early withdrawal penalty is waived.

Roth IRA income limits:

Single filers	Full contribution if modified adjusted gross income (MAGI) is below $153,000. The phaseout range for partial contributions extends from $153k–$168k. No eligibility after $168k of MAGI.
Married, filing joint filers	Full contribution if modified adjusted gross income (MAGI) is below $242,000. The phaseout range for partial contributions extends from $242k–$252k. No eligibility after $252k of MAGI.

Contribute to a 529 savings plan

Family members or friends can contribute to a 529 college savings plan on behalf of a child. Earnings grow tax free and are not taxed when used for qualified higher education expenses. Additionally, tax law changes over the last decade have expanded the definition of “qualified expenses” for purposes of utilizing savings in a 529 plan. For example, 529 accounts may be used to pay for K-12 expenses, qualified apprenticeships or professional credentialing programs.

Fund a health savings account (HSA)

HSAs are typically offered to individuals enrolled in health insurance plans with a high deductible. Most HSAs are available through an employer. But under the Affordable Care Act, individuals may fund an HSA when securing certain coverage through a state healthcare exchange. There is no time limit for distribution of the funds, and these accounts are portable.

HSAs also offer a “triple tax benefit” for savers. Contributions are made with pretax dollars, and assets grow without incurring a tax on the interest. Money withdrawn is tax free as long as it is used for qualified medical expenses.

For 2026, the annual contribution limit for individuals is $4,400. For family coverage, the limit is $8,750.

Contribute more to workplace savings

Individuals with access to a retirement savings plan at work may want to use the funds to ensure they take advantage of the maximum savings allowed. For those age 50 or older higher catch-up contributions within retirement plans are available.

Seek advice to take advantage of the tax landscape

With most taxpayers planning to use their refund to improve their overall financial situation, it may be an opportunity to include a financial professional in that discussion. For example, those receiving a higher refund may want to adjust withholding from their wages. The downside of receiving a tax refund is losing access to those funds, or earning interest, during the year.  A review of your overall financial plan may help optimize the benefit of that refund on your budget.

Endnote:
Source: “Two‑Thirds of Americans Expect Tax Changes to Affect Them Personally in 2026, Survey Finds.” TaxSlayer. January 26, 2026.