Friday, April 1, 2011

Tax (Refund) Time

I seem to be one of the few Americans who actually has to write a check sometime around April 15 each year. While I do pay quarterly taxes, it seems as if, most years, I do wind up with additional tax liability every spring.

This is, overall, a good thing. Typically, it means that I've earned more self-employment income than anticipated the previous year.

So, I'm not complaining (I'm really not ...).

However, it turns out that this year, I got a tax refund! (A happy event, although it does mean that my freelance income was down in 2010.)

Right now, our refund is parked in a savings account while we ponder what to do with it. But what do other Americans do - and how many actually get refunds?

Turns out that a whopping 77 percent of taxpayers received refunds last year, and many of them deliberately structure their withholding to do so. The average refund was about $3,000.

We have friends who do this. They basically have the government hold their money throughout the year, while they charge major purchases on their credit cards. When their large refund comes through, they use it to pay off all those bills they've accumulated the previous year.

I always thought this was silly, because not only are they foregoing interest they could be making by investing that withholding, they're also racking up credit card charges and interest they don't need to if they just employed a "pay as you go" strategy.

But it turns out that my friends are not alone, and their strategy may work for lots of people:

According to an early February online poll commissioned by the National Endowment for Financial Education*, 49 percent of those who withhold more from their paychecks to receive a larger refund and expect a refund this year say they plan to pay down debt and 44 percent plan to put the money toward savings.

Some filers receive tax refunds unintentionally based on their withholding decisions. For others, a large tax refund is part of their financial plan. The NEFE survey finds that 30 percent of filers intentionally withhold more from their paychecks so they can receive a larger refund when they file their taxes.

According to the NEFE survey, among the respondents who withhold more from their paychecks to receive a larger refund, 9 percent stated they are likely to spend the money without knowing for certain where it goes, while 26 percent of those who choose to have more money in their paychecks instead of a larger refund are likely to spend the money mysteriously.

So, if you're getting a refund, how should you request it? And what should you do with it? We'll talk about that next time.

*The National Endowment for Financial Education is an independent, nonprofit organization committed to educating Americans about personal finance and empowering them to make positive and sound decisions to reach financial goals.


  1. To me it makes sense to come out even. I can save more money by paying off credit cards during the year than letting the IRS hold onto it!

  2. I agree, Petrea. I prefer to do the same, though as I said most years I owe money in April. (Not this year - yay!)

    I think some people recognize that they don't have the financial discipline to keep their payments up to date, so they prefer to "have to" get a refund and then pay off their debt once a year.

    Better that than letting debt pile up with no way to pay it down, even though you're missing out on investment/earnings opportunities with the money that the government is "saving" for you!