68% of Taxpayers Plan to Do This With Their Tax Refunds

By Markets Fool.com


Source: AARP, Facebook.

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Whether you realize it or not, tax season is in full swing. Even if you're like me, and you've put off even thinking about your taxes until this point, the dozens of tax preparation advertisements and sign-twirlers on the local corner probably gave it away.

Truthfully, there aren't many people I know who enjoy doing their taxes -- and who can blame them? Taxes are a deep-dive into your previous year's financial history, requiring you to dust off old receipts and potentially enter hours or days worth of data into your computer via tax preparation software, or with the help of a tax professional. I can think of plenty of things I'd rather be doing, and I'm sure that feeling is shared among most taxpayers.

The pros and cons of tax time
Tax time is also an important time of the year for more than 80% of tax filers. The reason is because greater than 80% of tax filers, on average, are due a refund. These refunds are critical for consumers and the U.S. economy as a whole. They can boost consumers' emergency savings accounts, beef up their investment or retirement portfolios, go directly into the "fun money" pile and translate into discretionary purchases, or be used to pay down debts like revolving credit accounts, student loans, or even mortgages.

While I'm admittedly not a big fan of allowing the government to keep your money for up to a year without interest, if forced savings via federal income taxes are what help more than 80% of taxpayers save money who otherwise wouldn't, then it's not an entirely bad thing.

Yet, have you ever wondered exactly how Americans getting money back from the government actually plan to spend that refund? According to the National Foundation for Credit Counseling's latest survey, close to 70% of taxpayers receiving a refund plan to do one specific thing with their money in 2015.

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Source: AARP, Facebook.

Here's what Americans are doing with their tax refunds
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-Marthas 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.

Source: AARP, Facebook.

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.

Source: AARP, Facebook.

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.

The only question left is, what will you do with your refund this year?

The article 68% of Taxpayers Plan to Do This With Their Tax Refunds originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.