Most Taxpayers Plan to Use This Year's Refund Responsibly -- but the News Isn't All Good

MarketsMotley Fool

Each year, the overwhelming majority of tax filers end up getting a refund, and 2018 should prove to be no exception. If you're among the millions of Americans who expect money back from the IRS this season, you may be inclined to blow that cash on a vacation or luxury purchase rather than use it for more responsible purposes. But if that's the case, then you'd be in the minority.

An estimated 53% of tax filers who anticipate a refund think it'll fall somewhere between $500 and $2,500, according to research by TD Ameritrade, yet the bulk of those folks who get that money plan to put it to good use. And while that's encouraging news in its own right, it still speaks to a bigger problem -- namely, that most people are getting refunds in the first place.

Continue Reading Below

How will Americans spend their refunds this year?

It's pretty clear that tax filers anticipating a refund have some solid goals for that cash. Here's how Americans intend to spend that money, according to the aforementioned research:

Means of Spending Refund

Percentage of Filers With This Plan

Put the money into savings

33%

Fund an emergency account

15%

Buy discretionary items

13%

Pay off credit card debt

9%

Save for retirement

8%

Purchase necessities

8%

Invest in the stock market

6%

Clearly, Americans have finally come to terms with the fact that they need to do a better job of saving, whether it's to meet certain goals, like buying a home, or ensure that they have enough cash on hand to cover emergencies. Though savings rates have increased slightly among taxpayers in recent years, the bulk of Americans still have some catching up to do, especially since 39% of U.S. adults admit they have no money in the bank whatsoever.

Funding a nest egg, eliminating debt, loading up on necessities, and investing in stocks are also reasonable and responsible uses for a tax refund. In fact, of the above items, the only one that raises an eyebrow is the ever-unclear "buy discretionary items." It's hard to know whether those with this goal intend to, say, buy a car, which might open the door to new job opportunities, versus load up on needless electronics. Either way, the fact that these folks are in the minority is a good thing.

But despite the fact that Americans on a whole are aiming to use their tax refunds wisely, let's not gloss over the fact that these same folks shouldn't be getting that money back in the first place. And that's a line of thinking that's thus far been close to impossible to change.

The problem with tax refunds

What's so bad about getting a tax refund? After all, it's free money, right? Wrong. Contrary to what you may be wired to believe, a tax refund isn't a gift from the IRS. Rather, it's money that you earned all along and were entitled to throughout the previous year, only instead of collecting that money as you earned it, you decided to loan it to the government for free instead. That's a tax refund, in a nutshell, yet countless Americans are still convinced that they'd rather forgo that money up front and get it back when they file their returns.

Of course, much of this mind-set boils down to fear. We just learned that nearly 40% of Americans have no money in the bank, which means that if they were to wind up owing money on their taxes, they'd be in trouble. But what about the myriad of Americans who rack up debt each year because they encounter an unplanned expense and don't have the money on hand to cover it? These are the people who can't afford to be parting with a chunk of their income up front -- yet most folks fail to see things that way. Rather, they enjoy the security that comes with getting a hunk of cash during tax season, even if it means putting themselves at risk up until that point.

But that's not the only danger of getting a refund. Think about the 13% of folks who plan to use their so-called newfound money to buy the things they please. Had that money been coming in piece by piece in their paychecks, as opposed to in one lump sum, they perhaps would've saved it or used it on essentials. Instead, they're aiming to blow it in one fell swoop.

No matter how you look at it, refunds are just plain not a good thing for taxpayers. So if you've been getting one year after year, adjust your withholding and start getting more in your paychecks. If you're really worried about underpaying your taxes, take whatever excess money lands in those paychecks and stick it in a savings account reserved for emergencies only. This way, if you end up owing the IRS a bit come tax season, you can simply dip in and take the money from there. And if you wind up getting your taxes just right, you'll have that added cash available as part of your emergency reserve.

While it's nice to see that Americans are mostly grounded in how they'll spend their tax refunds, we need to attack this problem at the core, and it's by making those refunds become the exception, not the norm. Only then will taxpayers start to enjoy more of the freedom and flexibility that come with having immediate access to the money that's rightfully theirs.

The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.