Tax Refunds: to Spend, or to Save?

Tax season is right around the corner, and millions of Americans will be getting a refund check for the government. Some of them are already planning how to spend theirs, while others will pay down debt, or build their savings.

According to some new research from Bankrate.com, just 3% of Americans who expect to get a refund are planning to spend it on non-necessities like shopping or travel.

In fact, the most popular planned use for tax refunds will be paying down debt (34%), followed by saving/investing (33%) and spending on necessities (26%).

Of course, these findings merely reflect what people plan to do with their refunds, not what they will actually do. Many Americans will choose a mix of saving and splurging.

Millennials are the most likely to receive a tax refund, while those aged 50 or older are the least likely to, Bankrate found. Thirty eight percent of Americans would like to receive a big refund vs. only 19% who would prefer a small one.

What do the experts think? Most of them would prefer that you didn’t get any refund. Bankrate points out that tax professionals consider paying excess taxes to be a free loan to the government.

They’d like to see you pay just the taxes you owe, and then save or invest this “excess” money you would otherwise hand over to the government throughout the year. That way, you earn interest on your money for months, rather than tying it up in government coffers.

While this makes perfect sense, such a strategy can lead people to under-pay their taxes all year if they’re not really careful. When this happens, the government wants all that money – plus interest.

It’s funny how that works, isn’t it? When you over-pay the government, you get just the principal back. Yet, when you under-pay, you owe interest. Who said that life was fair?