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Subscribe to RSSIf you’re like a lot of Americans, chances are you’re hoping you’ll get a tax refund this year.
What’s more, you may be planning to take that money and do something frugal with it, like put it in a savings account or pay down debt.
Here’s the good news: Most people who say they plan to use most of their tax refund to bulk up savings or pay down debt keep the vow.
But here’s the catch: They also tend to spend at least some of that money on something like a nice dinner out or a new pair of boots, whether they realize it or not.
“There’s still a significant spending (boost) among this group,” said Jonathan Parker, a professor of consumer finance at Northwestern University’s Kellogg School of Management who has done research on how people spend government payouts such as tax refunds and stimulus checks.
It appears a lot of taxpayers plan to use their refunds to improve their personal finances.
A TD Ameritrade survey released last month found that 47 percent of those expecting to get a refund plan to bulk up their savings account with it, while 44 percent plan to use the money to pay debt.
About 28 plan to spend at least some on necessities and 15 percent plan to splurge on something discretionary. Respondents were allowed to pick more than one answer.
Using bank data and other sources, Parker has found that when people get money back from Uncle Sam, on average they tend to immediately spend a little bit more than usual.
“You often find a spike in spending right when it arrives – like, within a week of arrival – that’s sort of small,” he said.
The sudden jump in their bank balance may prompt some people to pay that bill that’s been nagging them, or it may make them feel like it’s OK to splurge on something small, like a date night.
After that, he said there’s sort of a delayed response. But over time, people who got money back do tend to spend slightly more overall, he said.
The people who say they are going to save most of their tax refund or rebate - or mostly use it to pay down debt - do use some of the money toward those goals, he said. But they also tend to spend more of it than they might think they did.
As for the people who said they planned to spend their tax refund? Parker said they mostly do what they planned.
“They were kind of right. They spent the whole thing,” he said.
When people get a bigger tax refund, there is often a bump in spending in August, he noted, suggesting that people are using the money toward a nicer summer vacation. Others who get a big chunk of money back from Uncle Sam, such as a check for over $1,000, may end up using it as a down payment on an even bigger purchase, like a car.
Even though people who think they are saving most of their refund or using it to pay down debt tend to spend some of it, Parker thinks the system of getting a refund can help some people budget.
“It’s a little bit like a helpful commitment to save,” he said.
Still, some taxpayers do complain about a tax system that can act like a forced savings plan – or surprise people with an unexpected bill.
Mark Zandi, chief economist with Moody’s Analytics, said that an ideal tax system would help people better predict their taxes through the year, so they didn’t end up at with a big payment or refund come April 15.
But given all the other complications of the nation’s tax code, he said it’s far from his top concern.
“I’m not sure I’d worry about that at this point,” he said.
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If I got a refund, I'd certainly use part of it for a little fun. The rest would get saved.
OK, now I'm waiting for the haters to get on here and blame Obama for the income tax system. And then the anti-haters to blame it all on Bush. :-P
No hating on any particular party here, rather a general disappointment in not having better tools for predictive taxation over the course of the year.
For those that go the vanilla EZ route this isn't much of an issue. But for those with a small business keeping track of all the moving parts under the covers can get cumbersome even with software.
I try to keep as close to zero as possible, if I get a refund it gets reinvested, if I owe it gets paid off ASAP. I then evaluate and tweak my formula for the following year to retarget zero.
mjs,
I also try and invest any return I get. I may have to wait until the market takes a dip before that happens, but it does most of the time get invested. Every once in awhile, you can find a decent tax free bond paying 5%, which is about the highest return going right now.
But with it being a tax free bond, that 5 turns into about a 7% return. Which is nice tax free income.
Yeah...Sure....Americans will send that money to the credit card company, then they'll go shopping and out to eat on that credit card until their balance is 10% higher than before they got the refund.
This cycle has played out year after year. A few people do actually save it...like I do, but America over all will waste it rather than improving their financial position with it.
Americans need to KEEP their money instead of letting the feds have it all year long at ZERO INTEREST.... even at 5%, it's something....
Imagine the hold we would have over DC if they had to ask for our taxes every year instead of TAKING them from us all year long?
It would also break this stupid idea that the government is GIVING you money..... it BELONGS TO YOU already......
We need antoher option, "I need to use it to pay more taxes." So much for Obama being the champion of the working man.
Correct JayEll. Only hater you have here is for MI governor who taxed my employee pension so his rich Republican donors got their tax break.
My question is this...if you get a refund then you are paying the government too much..would it not make sense to change your withholding to pocket more in your paycheck...i don't get refunds anymore...i actually have to pay but i'd rather write a check out now than give the government free money. just my two cents.
Same here.
Still, for those people that are not disciplined enough to save during the year, getting a refund at the end is probably the best approach (assuming they save some of the refund money or at least use it to pay down debt).
Your are right in that the correct thing to do is to withhold only what is required; however, some people use it as a forced savings account. I do this to pre-pay for my next years vacation. (I know I could do the same, but when we get money in our paychecks, my wife seems to find a way to spend it.)
I try to keep it close to zero, but the past few years, with uncertainty in employment, it was just easier to keep it where it was and take the refund. Once daughter is out of college, it will probably drop close to zero again.
There are a lot of people with poor impulse control. If they have an extra $60 then they will spend it. If they get a check for $2,000 they will save it since they won't blow 2k at a time. My sister is like this.
Sure it is an interest free loan to the government, but with what interest rates are these days that really doesn't amount to anything. Probably safer than paying penalties for underpayment one year.
first: the word "refund" covers all refunds. Could be $1.00 Could be $100. Clearly no huge overpayment to gubmint. Second: Money has no value anymore. IF someone overpaid the gubmint $2k, at todays rates at the credit union, they forgo about $3.00 (that's three dollars) in interest, which is taxable. No big woop, is it ? It's not 1990 anymore fellas. Worrying about over withholding on taxes isn't what it used to be.
IReadyou,
That would be 1.5% interest. What credit union do you use?
I don't understand why the IRS can't just establish reliable tax tables. I have multiple sources of income but it seems that a person working one job with no additional income should be able to claim their correct exemptions and come out zero at the end.
It seems that even claiming Single-0 doesn't work out for some when M-3 should do it.
I adjusted my witholding a couple years ago (from S-0 to S-2) and reduced my annual refund to about 30% of what I used to get. I still get a refund, though. It's just about three days' pay instead of two weeks'.
One of my coworkers, though, has his witholding maxed out on purpose (forced saving), then uses his refund to fund a vacation to London every year.
I make sure I claim zero so that I don't end up having to pay, since it's possible I might not be able to. Yeah, I should have some savings, but it's small and it's difficult to keep it in there. There's always something that needs a big chunk of money when you least expect it. I do save from every paycheck consistently and then when I get my tax refund I save a third, pay a credit card off with a third, and spend with the other third. I'm not necessarily splurging either; this year I had been putting off buying some new socks and other necessary clothing. Not exactly a big fancy purchase. I did splurge a tiny bit; I bought the Star Trek movie collections for a whopping $70.
Ha Ha Laura, I knew someone would take the bait. You know no ones puts the whole $2,000 in the IRS pocket on January first so it's there all year. You know that right ? So they put it in a little each paycheck and it takes all year to get there. Last installment goes in on or about Dec 31st ! So a $2,000 example is close to equalling a $1,000 "all year" just for quickie math. $3 divided by $1,000 is .30% which is close to what credit unions are paying. Hence the comment, money has no value.
It's all a big illusion, anyway. The tax refund is money you should have had in your pocket from the start. It's not "extra income" or a "bonus". It's money you were supposed to have but were overtaxed. What about all those people who were UNDER-taxed and actually have to PAY during tax season? That's got to be a biggest slap in the bollocks.
Actually, I did all 3. Some paid off debt taken out for energy improvements, some to savings to top up the emergency fund, some spent on kitchen renovation.
Rockyfortune is correct on this - structure your withholding to avoid a big refund, makes no sense to have the government hold your money for nothing. (in my own defense, I had a large transaction this past year where I had no control over the withholding, so I did get a big refund :) )
@Bob
Likewise, I also had large transaction in capital loses, which I will, not only this year, but the next two yrs, be able to deduct it, and will receive a nice refund. But normally I receive back between 1 or 2 hundred each year.
I agree, why give the govt a chance to hold/use your money without any return on your money. But all of my large return will be invested in the market, as soon as it takes it's March dip.
Unfortunately, I'm maxed out at 10 withholdings, but I still get a lot of money back since I rent out one of my houses. The rent really doesn't provide extra income. It only covers the mortgage / taxes / insurance. With the depreciation and the repairs / expenses, it qualifies as a big loss. So, I'm sort of stuck giving the government a tax-free loan.
Then claim Exempt...No taxes taken out.
Dummies with money still dummies with money...if you get a big refund that is mistake #1, taking a loan against it is #2 and #3 is turning around and spending it like a windfall...
why is it that the media assumes everybody get a tax refound
Seriously. When I worked, the largest refund I ever got was around $390. The commercials showing people getting thousands and thousands back baffle me.
People getting thousands back usually have kids and a business.
While I'm waiting for it, I spend it five or six times over -- in my head. But when I get it, I only spend on what I need and save the rest. This year, sadly, it will all go toward my homeowners quarterly premium payment.
We plan on a big refund every year. People say it is dumb but with interest rates as low as they are we would rather get a lump sum at the beginning of each year to use for projects and specific savings goals. Our is usually pretty substantial because of the way we plan. We always put a large portion into savings, splitting it between 529s for the kids and IRA for us. Sometimes we add to our "rainy day" fund. The rest we use for "capital improvements" on the house. Last year and this year we did take a chunk and put it aside and next year instead of house stuff we'll use the money plus some from other sources and buy a car since ours will need to be replaced. That way we can avoid taking on debt.
While this is how we plan, if we had debt other than our mortgage we would not over-withhold but rather use the money throughout the year to pay off the debt.
Home Improvements - after a terible decade of job losses our home needs help!
Richest Man in Babylon by Clason... read it. live it......
Mine will go into savings along with the 45% of my net pay that I put in every month.
Life is good!
I'm in finance and I try to tell people its better to owe the IRS or State than to get a refund. By owing the government, you have actually received an interest free loan because all you owe is the tax (as long as you have made proper payments during the year). If you are receiving a refund then you have given the government to what amounts to an interest-free loan.
It is indeed difficult to predict your tax liability from year to year so I tell people if you can keep your tax due or tax refund to $750 you're doing a pretty good job.
I understand some people use their refund as a forced savings plan because they don't posess the discipline to save otherwise. I know interest rates on regular savings accounts are miniscule, but its better than a stick in the eye!
So the article is predicting people will either save or spend their refunds. Duh!!
The other question for the survey should have asked about income level. Ironically, I think people toward the lower end of the income scale would do something toward paying an obligation where as people at the upper end would say, "spend it to have some fun".
Is it just me, or did the author spend the whole article saying pretty much the same thing over and over..
"people will save the money, but people will spend the money"
Seriously, that was the whole article, reworded about 6 times
I plan on investing mine, not spending it on things I don't need or want. I know some people may think I am wrong, but when I retire before I'm 50, I plan to have a very good retirement in place so I can live comfortable and enjoy life to it's fullest.
I have a formula: 50% for savings, 45% pays down debt, and 5% is for me...
Next year in 2014, the new health law Obamacare goes into effect. If you don't have insurance, you get fined and you get no refund from your income tax. The cost of health care and insurance keeps going up. The people who don't have insurance can't afford it. There has been nothing done about this issue about affordability or nothing has been done that works. I believe that they really want to take our refunds away is why there is now going to be a penalty for not having health insurance.
I have kids so got a fairly big tax return so we caught up on bills, put some in savings for our emergency fund, and spent big portion of it on stuff for the family (like clothes, shoes, golf equipment, and took family out to eat several times).