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Forget the shopping sprees and vacations. Taxpayers are plowing their refunds back into savings.
Close to a third of adults who expect money back from Uncle Sam this year plan to save most or all of the cash, according to a recent poll from review site CreditCards.com.
It’s a shift from last year, when many Americans prioritized bailing themselves out of debt with their windfall.
The website took an online poll of 2,795 adults from Jan. 29 through Jan. 31.
“For many households, this tax refund is the biggest chunk of money they’ll get in the year,” said Ted Rossman, industry analyst at CreditCards.com.
Paying down debt came in second place, with a quarter of participants expecting to do so. Just over 1 in 10 plan to use the cash for day-to-day expenses — the third-most-popular option, the poll found.
Thus far, about five weeks into tax season, most filers are getting something back from the federal government. The IRS received about 49.8 million returns for the 2019 tax year as of Feb. 21.
Of these, 37.5 million households have received refunds, with the average check adding up to $3,125.
While getting a windfall from the federal government certainly feels good, it could be a sign that your tax withholding needs a tune-up.
The value of a lump sum
How much you withhold in taxes at work is key to determining whether you will owe the federal government or get money back the following April.
When the Tax Cuts and Jobs Act went into effect in 2018, the Treasury and IRS overhauled the tax withholding tables and Form W-4. Together, these forms determine the amount of income tax withheld from employees’ paychecks.
Changes to the withholding documents reflected the higher standard deduction, the elimination of personal exemptions and tweaks to certain itemized deductions.
Those who withhold too much from their pay are more likely to get a refund the following year. But there’s a trade-off: You take home less money.
More from Smart Tax Planning:
Millions of households avoided the AMT hit last year
Four reasons why you might not see that big tax refund
How to maximize traditional and Roth retirement savings
Withhold too little, and you’ll keep more of your paycheck through the year. However, you run the risk of owing the taxman the following spring.
Close to 90% of survey participants said they would rather get a huge lump sum back from the federal government than have the money in their wallets throughout the year.
“Finance is emotional and not always totally rational,” said Rossman. “The lump sum might be more meaningful to them versus getting the money in dribs and drabs throughout the year.”
Tax season takeaways
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If you’ve already powered through your tax return, set aside some time to review your results and think about your finances.
Here are a few places to start:
• Review your withholding. Whether you wound up owing more than you would like or you received a massive refund, it might be time to take a second look at how much you’re withholding.
The IRS released a new Form W-4 for 2020, and it might be worth revisiting the taxes you pay throughout the year.
Review your latest tax return as you work through your W-4, especially if you have side-gig income, dependents or used to take itemized deductions.
• Got a refund? Draft a plan. Earmark some of your cash for savings and some for eliminating debts. “If you’re under-saved and you have a lot of credit card debt, it’s very expensive,” said Rossman.
“You can split the money and pursue both goals at the same time.”
• Search for tax savings opportunities. If you haven’t submitted your 2019 return, but you’ve already crunched the numbers, consider last-minute savings opportunities.
A major one is the opportunity to contribute to an individual retirement account or a health savings account — a tax-advantaged account that works alongside a high-deductible health plan.
Taxpayers can chip into these accounts before April 15 and apply the contributions for the 2019 tax year.
