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How To Turn Tax Refunds Into Savings

The ongoing flap over tax refunds has once again highlighted a serious issue: Americans use tax withholding from their paychecks as a major savings tool. They give the government more than they owe in income tax throughout the year just so they can get a check the following spring. For many low-income filers, overwithholding has become their preferred, and perhaps their only, way to save. They ought to have a better option.

Traditional economists say deliberately having too much tax withheld throughout the year is, not to put too fine a point on it, nuts. It is, for those of us old enough to remember, Uncle Sam’s version of the neighborhood bank’s Christmas account. But the Treasury doesn’t even give you a toaster.

Instead, many of us give the US Treasury our money, earn no interest, and—often—use our tax refund to pay off debt we’ve incurred over the course of the year. Loans on which we may have been paying 14 percent interest or more.

“It feels good”

The size of this phenomenon is stunning. In 2017, the IRS issued almost $437 billion in refunds to about 122 million households—more than two-thirds of all filers. It refunded about $383 billion in individual income taxes and paid an average refund of almost $2,700. Households making less than $50,000 received one-quarter of all refunds, or about $100 billion. Some came from refundable tax credits but plenty was excess withholding.

So why do we do it? It feels good to get that check every spring—certainly better than writing a check to the IRS. According to one survey, 80 percent of low- and moderate-income tax filers explicitly say they consider overwithholding a savings tool. For many Americans, especially those who do not have bank accounts, there appears to be no better way to save. And that is a problem.

 

This article originally appeared on Forbes