Financial Planning, Retirement

What Will You Do With Your Tax Refund This Year?

3/26/20 12:00 PM

Due to potential coronavirus-related disruptions, the Internal Revenue Service (IRS) and the U.S. Treasury have together announced that taxpayers will get a 90-day reprieve for what they owe for 2019, i.e. they now have until July 15th to pay instead of the usual April 15th deadline. As of this writing Americans are still required to at least file their tax return by mid-April, but several lawmakers want to delay this by three months as well, and others have even suggested a blanket suspension of all federal tax-payment requirements for the time being. Note: The move by the Treasury Department and the IRS does not affect state income tax deadlines, but some states have started announcing their own delays.

Such extensions can help Americans who find themselves exposed to an unexpected financial hardship due to the COVID-19 outbreak weather the setback. The vast majority (around three-quarters) of taxpayers, though, should not wait to file because they instead receive a refund each year. Businesses were likely hopeful that this annual influx of cash to the millions of Americans who receive a refund would translate into a boost in consumer spending. However, exactly what people will do with their refund checks this year could depend heavily on how they are personally affected by the coronavirus and related containment efforts, and even ahead of the pandemic an updated National Retail Federation survey suggests that many Americans were already not in any rush to go on a shopping spree. Specifically, of the 65 percent of U.S. taxpayers who expect to receive a refund this year, only 24 percent intended to spend it on everyday expenses.

That is down from 25 percent among 2019’s refund recipients and one of the lower readings in the history of this annual survey. Moreover, even prior to the COVID-19 shock only 13 percent of respondents expecting a refund planned to use the extra money to pay for a vacation, and just 9 percent intended to “splurge” on clothes or leisure activities. The majority (50 percent) of refund-receivers instead anticipated adding the extra funds to their savings, a sharp increase from 2019. Alternatively, 34 percent of respondents said that they would use their refund to pay down debt. That is encouraging since many older Americans have yet to eliminate all of their financial liabilities. The Federal Reserve’s Survey of Consumer Finances (SCF), for instance, found that more than three-quarters of families with a “near-elderly” (age 55 to 64) head of household held debt in 2016 (most recent data available).

A lot of those liabilities can likely be attributed to mortgage debt, but around four in ten near-elderly households were found to still owe money on one or more credit cards. Similarly, our own more recent analysis of data from the Federal Reserve Bank of New York revealed that Americans ages 60 and older still owed around $3.3 trillion in Q4 2019, with 16.7 percent of this debt consisting of automobile loans and credit card balances. Many of these older individuals still carrying debt might have wrongly assumed that they would be able to pay off all of their financial obligations in a reasonable timeframe, therefore further highlighting the importance of trying to eliminate higher-interest-rate revolving debt while you are still working and have a larger income. It is also worth noting that although it may feel nice to receive a large refund each year, some financial experts consider it an inefficient use of one’s cash flow.

For example, rather than giving the IRS an interest-free loan each year, Bankrate's Greg McBride in an earlier analysis recommended the following: “Adjust your paycheck withholding so that extra money lands in your hands every payday instead of Uncle Sam's. But the next step is even more important – use that extra money to increase your 401(k) contributions or have this direct deposited into your IRA. Instead of spending that $50 per biweekly pay period on morning lattes and having nothing to show for it, directing it into your retirement account makes your nest egg $7,600 bigger 30 years from now – and that’s the impact of just one year’s additional contributions. Keep that habit for the next 30 years, and with a 6 percent return, you’re looking at an extra $109,000 in your retirement account.”

 


 

Sources: U.S. IRS, NRF, FRBG, America Saves, Bankrate

Post author: Charles Couch

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