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Many Americans don’t understand where income tax refunds come from or how they work, but they love getting refunds anyway, a Credit Karma survey finds.
Americans are supposed to pay their federal income taxes throughout the year, either through payroll withholdings or by making estimated tax payments. If they overpay, they could be eligible for a refund of the amount overpaid come tax time.
But just 46% of respondents from a recent Credit Karma/Qualtrics survey know that their refund money technically comes from their own paycheck. Still, Americans have (mostly) good ideas for how to use the cash. (Learn about our methodology.)
Building savings and paying down debt — worthy financial goals — are among the top uses our survey respondents say they’ll put their refunds toward if they get one next year. But the No. 1 way Americans say they’d use their refunds is more concerning: 32% say they’ll put most of their refunds toward paying for necessities like bills, rent and groceries.
Key survey findings
|46% of respondents expect to get refunds of more than $1,000 in 2020 (for their 2019 taxes) — meaning they’re significantly overpaying their income taxes throughout the year.|
|54% plan to put their refunds toward sound financial goals, including building savings (30%) and paying down debt (24%).|
|Building emergency savings (51%) is by far the most common objective of those who say they’ll save the money.|
|Hammering away at credit card debt is the most common goal (55%) of those who say they’ll put their refund toward paying down debt.|
|More than half of respondents (51%) are unaware that they can take actions that impact the refund amount they receive, if any.|
Americans embrace tax refunds
The majority of respondents from our survey (55%) say they would rather get a tax refund than have more money in their paychecks throughout the year. Meanwhile, just 34% said they’d prefer to hit the sweet spot of paying exactly the right amount of taxes — which would result in them not getting a refund or a tax bill come April 2020.
For 44% of respondents, their tax refund is their biggest paycheck of the year — which could help explain the broad enthusiasm for refunds. Still, although they look forward to their refunds, the majority of respondents say they’d be fine financially without it. Just 24% say they depend on their refunds to the point that not getting one would leave them in a dire financial situation.
But many are in the dark on how refunds work
Despite their appetite for refunds, a notable number of survey respondents don’t seem to understand how tax refunds actually work.
While 46% know the money for their refunds actually comes from money they already paid the government, basically their paychecks, the same percentage thought the money comes from the government. And 4% say they don’t know the source of their refund money at all.
What’s more, a majority of respondents couldn’t fully identify just what getting a tax refund means.
While 40% of respondents correctly said that getting a tax refund means they overpaid their income taxes for the year, only 11% knew that getting a refund is also basically the same as giving Uncle Sam an interest-free loan. And only 7% knew it may mean they need to adjust their withholdings. Just 29% of respondents were aware that a refund actually means all three.
And over one in 10 respondents, 13%, didn’t know any of these were the realities behind tax refunds.
What this could mean
Lack of awareness could help explain why over half — 51% — of respondents didn’t realize they can influence whether they get a refund each year, and for how much. Forty-one percent believed they have no control over how much refund they get, while 10% said they didn’t know. In reality, making adjustments to your W-4 and making estimated tax payments, if necessary, throughout the year can affect your potential refund amount.
However, the majority of respondents also say they won’t even begin thinking about their 2019 taxes until 2020, the year in which they’ll file their 2019 returns. While certain actions can help taxpayers adjust the amount of tax they may owe or get refunded, typically those actions need to be taken earlier in the tax year in order to have a significant impact. For example, while you can adjust your W-4 any time during the year, adjustments made later in the tax year will have less of an impact on your taxes for that tax year.
Good intentions may signal less confidence in economy
Although many Americans may not fully understand how refunds work, most are already planning how they’ll use any refund they may get in 2020.
Just 10% of those expecting a refund say they’ll spend it on an item or experience they want. Instead, the majority say they’ll put the money toward their finances; 30% will save the money, 24% will use it to pay down debt and 32% will use it to pay bills, rent, groceries or other necessities.
Among those who plan to save their refunds, 51% said they’ll use it to build their emergency savings. And 55% of those who plan to apply it to debt say they’ll put it toward credit card debt.
What this could mean
While these numbers may seem positive, there might be a less encouraging reason for them. The focus on boosting financial cushions and decreasing debt could indicate feelings of financial uncertainty among respondents. In fact, one in 10 respondents, or 10%, who plan to save their tax refunds next year plan to do so because they’re worried a recession is coming.
What’s more, the use of a once-a-year source of income to pay day-to-day expenses could mean that taxpayers are struggling to manage those recurring expenses over the long-term.
The Credit Karma survey revealed both good news and not-so-good news about Americans’ relationships with their income tax refunds. On the positive side, a lot of those who expect a refund say they’ll put it to good use by boosting savings and paying down debt.
But responses to questions about the source of tax refund money, and if and how taxpayers can influence their refunds, show a significant knowledge gap. And the strong preference among respondents to get a refund — rather than pay exactly the right amount — may indicate people lack confidence in their own abilities to save money throughout the year, and instead rely on Uncle Sam to do the job for them.
To better understand Americans’ relationships and attitudes toward tax refunds, Qualtrics conducted a nationally representative online survey in October 2019 on behalf of Credit Karma among 1,032 American adults who received a tax refund in 2019 for their 2018 taxes and are planning to file their federal and/or state taxes for the 2019 tax year.