Question: Why Do Close to 80% of People Overpay Their Taxes and Then Get Refunds?

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Apr 13, 2015
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Behavioral Finance, Question of the Day, Current Events, Taxes, Audio Resource

Loading up on tax ideas which seems appropriate with April 15th deadline looming…So, why is it that almost 80% of tax filers find themselves receiving a tax refund (average this year of about $2,800)?  Some might wonder if it is a government conspiracy to overwithhold while others might wonder if this is a backdoor way for people to save (or splurge).

So, what say ye tax experts (from Marketplace.org)?

  • Peace of mind:  “CPA Rich Sotta in Portland, Oregon, says a lot of his tax-preparation clients intentionally have too much withheld, knowing from prior years’ experience that they will get a substantial refund—often several thousand dollars or more. “It’s so they don’t have a huge tax bill they have to pay in April,” says Sotta. “It’s peace of mind, knowing that they’re getting refunds.” He says some taxpayers want a buffer in case their tax situation changes and their tax bill goes up unexpectedly—for instance, if they have sources of income that fluctuate year-to-year.”
  • Plan to make a big ticket purchase:  “That predictable April refund windfall can be used by taxpayers to make a big-ticket purchase, take a vacation, pay down debt or build savings.Hersh Shefrin, a professor of behavioral finance at Santa Clara University, says research shows that most taxpayers who receive refunds do indeed devote a substantial portion to intended uses like this, rather than splurging and spending most of it right away.”

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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