Tax Experts: How To Decide Whether To Take Your Refund Now or Apply It to Next Year’s Taxes
Written by
Kerra Bolton
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Jenna Klaverweiden
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Many taxpayers look forward to getting a tax refund.
However, is it always the best decision to take the cash now? Some experts suggest taking the refund if it’s needed to pay high-interest debt or address immediate needs, while others recommend applying it to next year’s taxes to reduce future liabilities.
GOBankingRates talked to tax experts to get their insights. Here’s how to decide if your refund should be in cash or applied to next year’s taxes.
Also see the pros and cons of getting a large tax refund.
When To Take the Cash
Tax experts said the decision whether to receive the refund in cash depends on one’s financial situation.
If You Have Debt or Want To Meet Other Financial Goals
If you have debt, a tax refund could be a good opportunity to pay down debt.
“Having a chunk of cash can be a great way to pay down debt or invest, especially right now when interest rates are higher than they have been in decades,” said Crystal Strange, senior tax director and CEO of Optic Tax. “The IRS doesn’t pay you interest on the money that you apply to the next year, so it is like giving an interest-free loan to the government.”
In addition, taking a tax refund in cash allows taxpayers to meet other financial goals, such as investing in stocks or opening a high-yield savings account to earn interest.
“You can also use your refund to add extra contributions to your investment accounts, such as [a] 401(k) or a 529 college savings plan,” said JustAnswer tax expert Roxanne Hendrix. “No matter your age, it’s never too early to set aside money for retirement. Investing your tax refund into an IRA or other type of retirement savings account can pay dividends down the road. If you have young children, you might also put a priority on saving for their college education.”
If You’re a Business Owner
Gretchen Roberts, CEO of Red Bike Advisors, an accounting and tax firm, said business owners should get a cash refund.
“We work with small business owners who end up with refunds due to, for example, taking accelerated depreciation, and it’s almost always a good idea to plug that money back into the business or stash it in savings for the next equipment purchase,” Roberts said.
When To Pay It Forward
There are, however, circumstances in which it might make more sense to put your tax refund toward next year’s taxes.
If You Expect To Have More Income Next Year
Stranger said taxpayers who expect to have more income in 2025 than they had in 2024 should consider carrying the refund forward, especially if they missed a tax payment.
In addition, a taxpayer who realizes they have had substantial income for which they won’t have enough withholding should carry the refund forward. “For example, if you sell a rental property in 2025 or have a big windfall, then you may want to carry forward your refund to the next year,” Stranger said.
If You’re Behind
Stranger said taxpayers who have gotten behind for several years and are filing multiple years at once should consider carrying the refunds forward to the most recent year.
Paying it forward could also help individuals who have trouble saving money to pay taxes.
“If you typically have trouble scrounging up the cash to pay taxes, or if you’re so busy and making so much money regular (quarterly) payments, applying it to next year is a good option for you,” Roberts said.
Plan Ahead
Nevertheless, Hendrix said getting a tax refund is not a guarantee.
“Even if you have been receiving a tax refund for the past five years, it does not mean you will get a refund this year too,” Hendrix said. “Your situation may have changed, such as you got a promotion that comes with a hefty salary increase or you took some money out of your retirement accounts.”
Since a refund is never a guarantee, you should be prepared for that possibility and plan ahead. “Just be prepared to understand why you may not get a tax refund this year and plan accordingly for that in the future,” Hendrix said.
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