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What to do With That Tax Refund--or Big Tax Bill

Last year, the average tax refund was $2,860, according to the IRS. That’s enough to cover nearly two months of housing costs for the typical person, according to the Bureau of Labor Statistics. About 70 percent of last year’s returns resulted in refunds, which means that there’s a good chance you’ll be getting one this year, too. 

If you’re on the refund list, what’s the smartest way to spend or save that tax return? And if you’re one of the few who will owe the government a check, what should you be doing to avoid the situation next year? Here are a few strategies. 

If you’re getting a refund:

Build up your emergency fund. Thirty percent of respondents to a recent Fifth Third survey don't have an emergency fund at all, and 47 percent frequently live paycheck to paycheck. If you’re getting a sizable check in April, that presents a good opportunity to shore up what might be a lagging emergency account. Experts recommend having three to six months of living expenses in an accessible account earning a little interest, such as a money market account.

Sock it into retirement savings. More than half of Americans don't contribute to a 401(k), IRA or other retirement plan, according to Fifth Third findings. One smart way to use your tax refund is to repurpose it into a traditional IRA or a Roth IRA contribution. Additionally, you could send funds to your HSA (Health Savings Account) for future health care needs—experts estimate a 65-year-old couple retiring now will need about $260,000 to cover health care costs in their golden years.

Put it toward college. If your emergency fund and retirement savings are on track and you have children headed to college one day, consider devoting your refund to an education savings plan. The average annual cost for tuition, room and board at a public in-state university was $20,092 for 2016-17, according to the College Board. Depending on your state, you might even get an income tax break next year for investing in your state’s 529 plan. Visit to find out what your options are.

Invest it. Now might also be a great time to fund some taxable investing accounts—such as no-load mutual funds or particular stocks you’ve been eyeing. When you invest in these accounts, you can access the money easily if you need it, unlike retirement accounts, and you can minimize the tax burden from any potential gains by investing for the long term. A financial advisor can help you create a tax-efficient portfolio. 

If you owe this year:

Adjust your withholding. If your income or family situation has changed—or if you simply misfired when you first filled out the paperwork—it may be time to resubmit your company’s W-4 with some new information. Utilize the IRS’s withholding calculator to see what changes you can make to reduce your tax liability, as you may need to take fewer allowances. 

Revisit your estimated taxes. If you’re self-employed and track your own income, there’s a chance you might owe the IRS more than expected if you’ve miscalculated your estimated taxes throughout the year. Tax software can help you gauge what you should be paying in quarterly taxes, and an accountant can also offer guidance. If you miss the total by a large degree, you’ll also pay a penalty to the IRS, so this is worth getting right.

Plan for it. Owing the IRS—as long as you don’t owe more than you can afford—isn’t necessarily a bad thing. After all, if you get a big refund from the IRS, you are essentially giving the government an interest-free loan throughout the year. If you know you’re writing a tax check in April, use the first few months of the year to set money aside for it. A little advance prep can go a long way toward a stress-free tax season. 

Whether you're receiving a refund or paying taxes this year, use these insights to make sure you're being responsible with your income now and in the future.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank.