How Americans Use Their Tax Refunds

This post comes from Mark Henricks at partner site MintLife.

The most popular single use for the cash taxpayers get in refunds from Uncle Sam is savings, according to annual surveys conducted by the National Retail Federation.

Last year’s survey found that nearly 44 percent of the people who anticipated refunds planned to put at least some of it into savings. The next most-popular destination for refunds is in an envelope headed for a credit card company or other lender, the Tax Returns Consumer Survey found. Almost 40 percent of the respondents who were getting refunds said they’d use some to pare down debt.

Another big chunk of taxpayers – 29 percent – planned to use their refunds to pay everyday expenses.

Major purchases such as a new television, furniture, or automobile were anticipated by 12 percent. And 11 percent were looking forward to financing a vacation with part of their refund checks.

The average amount of a tax refund

Where Americans spend their refunds makes a difference to a lot of people, including those who aren’t expecting a refund. That’s because the total dollars are huge; the Internal Revenue Service says for fiscal 2011 it issued individual tax refunds for $337 billion.

Nearly 120 million individual taxpayers got refunds that year, which averages to about $2,800 per person. That check is the largest single lump sum of money the average American family receives in a typical year, according to an estimate by the American Tax and Financial Center at TurboTax.

It comes to more than a month’s worth of income for two out of three taxpayers, the center estimated.

Factors that affect how tax refunds are used

If you slice and dice that group of 120 million, you find that different taxpayers spend their refunds in slightly different ways.

For instance, nearly 41 percent of women said they’d use part of the refund to pay down debt. Less than 38 percent of men made the same choice.

Men and women also diverged on savings. Forty-five percent of men allocated part of the refund for savings, versus less than 43 percent of women.

Income played a role as well. Taxpayers reporting more than $50,000 in income were more likely, at 52 percent, to put refunds into savings than those who made less.

A little over 48 percent of those earning under $50,000 planned to direct part of their refunds to savings.

One of the reasons people are likely to use refunds to pad their savings, according to a study, is that the refund comes in a single large payment.

The report in the Journal of Economic Psychology described an experiment suggesting that if people got their refunds in monthly installments rather than all at once, they’d be more likely to spend the refunds.

The current edition of the National Retail Federation survey of tax refunds should be released in late February. The annual figures don’t usually change much from year to year.

Last year, however, the number of people who said they planned to sock part of their tax refund into savings was the highest in the nine years the survey has been done, up nearly 2 percentage points form 2011.