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

Apr 13, 2015
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

  • 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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