Don't squander those tax refunds! Advisors offer tips for clients getting cash back from Uncle Sam

Americans that overpaid on their taxes throughout the year will soon be getting refunds from Uncle Sam. Some of those checks will be sizable enough to make a difference in their long-term financial plans.

And that’s where a financial advisor can step in to make sure those dollars – and plans – are not squandered.  

Ed Mooney, director of financial planning at Fiduciary Trust International, says a tax refund is best viewed as a cash-management decision rather than a windfall. In his view, a practical approach is to first reduce high-cost debt and ensure adequate cash reserves are in place. Once those priorities are addressed, he says the remaining funds can be directed toward long-term goals such as retirement contributions, education savings through 529 plans, or other goal-based planning vehicles relevant to the individual’s situation.

For individuals with variable income such as bonuses, equity compensation, self-employment income, or sizable investment distributions, it can also be prudent to reserve a portion of the refund for upcoming estimated tax payments, according to Mooney.

“Retirement contributions and education savings plans are common destinations, as refunds can provide a structured way to accelerate long-term planning. There is also continued emphasis on maintaining adequate emergency savings, particularly for households with variable income or evolving financial obligations. The key is aligning the refund with existing priorities rather than treating it as discretionary spending,” Mooney said.

Mooney adds that owing taxes is often a withholding and timing issue where what was paid during the year did not align with the ultimate liability. Common drivers include higher-than-expected compensation, bonus withholding that does not reflect an individual’s effective tax rate, capital gains and dividends in taxable accounts, or retirement distributions with insufficient withholding. Life changes such as marriage, divorce, a new dependent, or a job change can also affect the outcome, according to Mooney.

“A review of withholding elections is often warranted to better reflect current income and deductions. Retirees can frequently adjust withholding on pensions and retirement distributions to spread tax payments more evenly throughout the year. For those taking required minimum distributions, qualified charitable distributions may be appropriate if they are eligible and charitably inclined,” Mooney said.

Elsewhere, Tommy Doerfler, wealth advisor and president at Lighthouse Wealth Group at Steward Partners, says he encourages clients to see a tax refund not just as a check from the IRS, but a chance to move their financial life forward.

“We generally look at three priorities: paying down high-interest debt, strengthening cash reserves, and investing for the future. The right choice depends on where someone stands financially. If a client is carrying high-interest debt, reducing that burden is often the most impactful first step. If their safety net is thin, we may prioritize building up an emergency reserve so unexpected events don’t disrupt their broader financial plan,” Doerfler said.

Added Doerfler: “A tax refund may feel like a small, one-time windfall, but when it’s aligned with a clear financial plan, it can become another meaningful step toward long-term financial independence and security.”

The good news, says Doerfler, is that he is seeing more clients treat tax refunds with greater intention than they did in the past. Rather than viewing the refund as spending money, many are using it as a way to make meaningful progress toward specific financial goals.

For some clients, that means boosting retirement contributions—whether funding an IRA or adding to long-term investment accounts that can compound over time. Others choose to direct refunds toward their children’s future by contributing to 529 college savings plans. And in recent years, he’s also seen a stronger focus on financial resilience, with many clients using refunds to strengthen emergency savings and improve their overall financial stability.

Furthermore, for higher-income clients who owe taxes, Doerfler says he tries to reframe the conversation.

“Paying taxes simply means you made money. We work with clients throughout the year—not just in April—to help eliminate any surprises at tax time. When viewed through that lens, tax season becomes less about reacting to a bill and more about refining a strategy for the years ahead,” Doerfler said.

Finally, Thomas Pontius, senior financial planner at Kayne Anderson Rudnick, says he generally wants clients to have as small a refund as possible because that means they were accurate with their withholding and estimated payments during the tax year. He notes that the 2025 tax year is unique in the sense that the One Big Beautiful Bill Act was passed in the middle of the year. Some of the provisions from that new legislation will reduce tax liabilities for a large population of Americans resulting in larger refunds for clients when they file in April, or later if on extension.

“Statistics say that Americans tend to spend their tax refunds but this refund can be an opportunity to use the cash more advantageously. Many times, a refund can help increase their existing cash balances that may be depleted. Others who don’t need to replenish their cash balances use it as an opportunity to pay down debt, contribute it back to investment accounts, make gifts to kids, or even just roll the refund into a payment for the next tax year,” Pontius said.