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1 in 3 Americans Will Spend Their Tax Refund (& That's a Bad Idea)

NEW YORK (MainStreet) – Tens of millions of Americans will be getting tax refunds this year, but many won't be putting theirs in the bank. Instead, one study says they'll be cashing and then spending it. That's good for the economy – but is it good for consumers?

Americans received $318 billion in tax refunds in 2011 – down from $328 billion in 2010, according to the Internal Revenue Service. The average refund was $2,913 in 2011, again down slightly from 2010 when it was at $3,003, the IRS reports.

What will Americans do with all that loot in 2012? A new survey from Capital One has some answers on that front.

Capital One found that 33% of Americans will spend all or part of their tax refund this year.

The survey also says that 44% of Americans will use the cash to pay down debt or stash it in a bank account, and 5% say they will invest the money.

According to survey, here are some other ways Americans plan on spending their refund check this year:

  • 8% will use the cash for a vacation.
  • 6% will buy new clothes.
  • 9% will make a major purchase, like a new car or big appliance.
  • 28% will use their tax refunds for “everyday expenses”.

Perhaps most revealing, 69% of all Americans don’t factor their tax refund at all into their personal budgets. That’s a mistake, Capital One says.

“Most people are not factoring their annual return into their overall financial plan and long-term objectives,” said Mickey Konson, managing vice president for retail banking at Capital One Bank, in a statement. “Tax season is a good opportunity for people to plan ahead, with an eye toward their future goals and financial health.”

Of course, some taxpayers will owe money, and Capital One says that 32% of those taxpayers will have to use personal savings to cover their tax bill, and 19% will have to hammer out an agreement with Uncle Sam.

For Americans who are getting money back, many seem to view their tax refunds as “free money,” much like an inheritance or a bonus from work. Capital One says if, instead, a tax refund was viewed as the financial transaction it actually is – a return of one’s own money from the federal government – the cash would be used more prudently.

The trick is to view a tax refund as you would your own paycheck. In that light, you wouldn’t take your paycheck and blow it on a trip to Cancun, or spend it all on eBay on a rainy afternoon.

So if you’re one of those Americans getting a big, fat tax refund this year, re-evaluate the way you look at it. Thinking of it as a “paycheck” will result in a wiser use of the funds, Capital One says. But viewing it as a “free gift” might mean the money has a better chance of flying out the window.

To stay up to date on the latest tips and news this tax season, check out MainStreet’s Taxes topic page!

Read More:   budget & save, savings, taxes
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