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What 80% of the Tax Filers Do With Their Tax Refunds

After the tedious task of preparing and filing your tax return, receiving your tax refund almost feels like a reward. More than 80% of filers receive a refund during tax season. Considering that, consumers, businesses and the economy are hugely impacted by how taxpayers decide to use their refund money.

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Millions of taxpayers now use direct deposit to receive their tax refunds. In addition to being a faster way to get money, it also provides greater security to taxpayers. Unfortunately, many people are having to immediately use their transferred refunds to pay off a debt. Forbes shares the statistics:

“Based on a survey of more than 1,000 respondents expected to receive a refund, 68% of respondents noted their intention to use their refund to pay down or pay off debt. An additional 15% of respondents plan to use their refund to pay for basic necessities, while 11% plan to boost their savings accounts. Just 2% announced their intention to spend their refund on something fun, while roughly 4% were still undecided.

“Do these results surprise you?

“They really shouldn’t, at least when it comes to the bias toward debt repayment. As of Dec. 2014, and according to statistics from NerdWallet, the average U.S. household has $15,611 in credit card debt, more than $155,000 in mortgage debt, and student loan debt totaling in excess of $32,000! Taxpayers putting their refund (which averaged $3,034 in 2014, according to the IRS) toward debt could mean less in future interest payments, and potentially more credit options available should they want to buy a home or a car, or finance other large items in the future.

“What might be a bit concerning with the above data is how many taxpayers are planning to buy ‘basic necessities’ with their refund, and how few are putting it toward their investment and/or retirement accounts. But, even these figures can be somewhat explained.

“With regard to those buying basic necessities with their refund, this might be partly explained by the U.S. Census Bureau’s findings in September that 45 million people, or 14.5% of Americans, were living below the poverty level. While I doubt the 14.5% in the U.S. Census’ study and the 15% in the NFCC’s study perfectly correlate, families around and below the poverty level are more likely to use their refund to stock up on basic-needs items. This is also a reason why Wal-Mart has offered to prepay tax filers their refund upfront, because in addition to the prepayment fees, it could capitalize on basic-need sales from cost-conscious consumers.

“The low rate of taxpayers contributing to their savings and/or investment accounts certainly explains why so few people are on the right track to retire on their own terms. It’s also a function of high household debt levels, which make adding to a retirement account difficult, if not impossible.

“How Americans can potentially be smarter about their money

“Ultimately, I can’t fault nearly seven in 10 taxpayers from wanting to pay down their debts. Once these debts are reduced, it’ll free up excess capital for investment purposes, and it ultimately should lighten some of the stress that debt can cause. But, it doesn’t mean there aren’t opportunities where taxpayers can be smarter with their money.

“For instance, as I noted earlier, allowing the government to owe you money at the end of the year isn’t the wisest plan. While it does force some people to save who otherwise might be poor savers, it also allows the government to borrow from you for free! You can’t borrow from a lender for free, so why should you feel fine about letting the government hang onto an average of $3,000-plus of your money every year?

“The solution is to adjust your federal income tax withholding to what you estimate your annual income will be. The best part is this can be changed during the year, so if you make more or less, you can adjust your tax withholdings to compensate. If your plan is to pay down your debt, it would be more advantageous for you to have your money now rather than next April, when additional interest on your debts have accrued.

“Another area where taxpayers are lacking is in regards to understanding their cash flow. According to a Gallup poll conducted in the summer of 2013, just 32% of Americans keep a detailed household budget. Those with higher levels of income ($75,000 and up) were a bit more likely to keep a budget, but even then, it was just 39% of respondents compared to only 30% of Americans in the $30,000-$74,999 annual income range. Not keeping a budget makes it very difficult for consumers to understand where their money is going once it comes in, and it can make stashing money away for retirement veritably impossible.

“The solution (surprise, surprise!) is to formulate a reasonable monthly budget you can stick to. Even if your budget changes a bit on a month-to-month basis, just understanding where your money is flowing for even a few months can be a big eye-opener that could result in you being able to save money for retirement and/or pay off your debts quicker.”