Are Americans’ tax refunds standing in the way of their savings goals?

Hand putting one dollar bill into pink piggy bank. Saving money conceptImage: Hand putting one dollar bill into pink piggy bank. Saving money concept

In a Nutshell

Many Americans understand the importance of having a nest egg, and some look to their tax refunds to help build their savings. But relying on Uncle Sam for forced savings might mean they’re overlooking more effective ways to save money, such as investing in a high-yield savings account throughout the year.
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Many Americans view overpaying their federal income taxes as a way to force themselves to save each year, a previous Credit Karma survey has found.

Yes, overpaying taxes throughout the year could mean you get a refund the following year when you file. But it also means less take-home pay throughout the year. And less take-home pay could prevent Americans who want to build their savings from taking advantage of beneficial financial products like high-yield savings accounts or retirement accounts.

Two separate Credit Karma surveys, one from December 2019 and another from November 2019, illustrate the disconnect between Americans’ savings goals and their level of understanding about how to reach those objectives. (Learn about our methodology.)

Key findings

Among respondents who didn’t have a savings account, 42% said they don’t have enough money to justify having an account, our November high-yield savings survey found. Even so, more than half (55%) of respondents from our December tax refund survey said they’d rather get a tax refund than have more take-home pay through the year.
Most respondents (76%) said they have money in a savings account, our high-yield savings survey found. But our tax refund survey found only 30% of those who expect a refund this year intend to put most of it into savings.
Americans lack knowledge about both tax refunds and high-yield savings accounts, our surveys found. Just 46% of respondents knew refund money comes from their own paychecks, while 41% didn’t know what a high-yield savings account is.
Around two-fifths (41%) of savings survey respondents who said they have savings accounts didn’t know how much interest their accounts earn, and 54% of tax survey respondents couldn’t accurately say or didn’t care where tax refund money comes from.

Americans want to save more

Both Credit Karma surveys show that Americans want to put money into savings. Nearly three quarters of those who responded to the savings survey said they feel they could or should save more.

In fact, more than three quarters (76%) of respondents from that survey said they do have money in a savings account. And among tax survey respondents who said they plan to save their 2020 tax refunds, 51% said they’ll use it to build their emergency savings.

But many struggle to do so

Still, responses from both surveys point to an ongoing struggle for some Americans.

Many savings survey respondents cited a lack of income as the greatest obstacle to reaching their savings goals. Among respondents who didn’t have money in a savings account, 42% said they just didn’t have enough money to justify having a savings account. And 30% said their paycheck-to-paycheck lifestyle prevents them from saving as much as they’d like.

Meanwhile, nearly a third (32%) of tax survey respondents said they plan to use their tax refunds to pay for necessities like bills, rent and groceries. And 24% said they intend to put their refunds toward paying down debt, including credit card and auto loan debt.

But using a once-a-year source of income to pay regular bills could mean taxpayers have difficulty managing those expenses during the rest of the year.

Ways to save more

While some Americans are successfully building savings, both surveys illustrate that a lack of knowledge about savings and taxes could be hindering others from reaching their savings goals.

More than a third of those surveyed in the savings poll say they wouldn’t know where to begin if they wanted to establish a high-yield savings account. And among those who have a savings account, just 59% know how much interest their primary savings account earns.

Those who rely on their tax refunds as a way to save throughout the year may be getting in their own way, too.

“People who look at their tax refunds as a forced savings may fear they don’t have the discipline to save on their own,” says Christina Taylor, Senior Operations Manager at Credit Karma Tax®. “But the IRS typically doesn’t pay interest on refunds. By saving money on their own in a savings account, taxpayers could almost certainly achieve a better rate of return than zero.”

If individuals are receiving large refunds each year they should review their W-4 withholdings to see if they can keep more in their paychecks every month — and then consider using automatic deposits to put the extra money directly into a high-yield savings account or other type of savings vehicle. The IRS offers a free Tax Withholding Estimator to help taxpayers gauge how much tax to have withheld from their paychecks.


December 2019 tax refund survey: 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.

November 2019 high-yield savings survey: On behalf of Credit Karma, Qualtrics commissioned a nationally representative online survey of 1,050 Americans ages 18 and over in August 2019 to better understand the savings goals and habits of Americans.

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