Do tax refunds actually cause you to overspend?

According to Time.com, 75 percent of Americans will receive a tax refund this year, but they aren’t always helpful to your bottom line.

According to Time.com:

“Most of the nation’s 100 million or so individual filers of federal tax returns will get a refund this year—an estimated 75%, in fact—and for those lucky souls we have a message: Be careful; windfall monetary gifts can be dangerous to your financial health.The culprit is one of the most common decision making biases identified in the past four decades of research in the field of behavioral economics. It’s called “mental accounting,” and it’s a subject visited frequently in this blog. Mental accounting is the process by which the human brain, consciously or otherwise, labels and prioritizes money differently depending on where it comes from (paycheck vs. gift from grandma), where it’s kept (savings account vs. stock market), how it’s spent (home repairs vs. vacation cruise), or  size of transaction (we value a $5 discount on a $20 item more than same discount on a $100 purchase)….”

Research suggests that if you get a $300 refund you’re more likely to make a $300 discretionary purchase with it than if you get a $3,000 refund—even though you can afford to splurge more, and still save a lot, in the second instance. (Up to a point, of course: Given a big enough windfall, most people will splurge and save.) It seems that a larger amount of found money makes it more difficult to spend, serving to boost what economists call our “marginal propensity to save,” or MPS. Smaller windfalls, on the other hand, increase our MPC, or “marginal propensity to consume.”…”

“For whatever reason, small windfalls were mentally accounted for not only as eminently spendable, but as spendable over and over again! If this sounds unbelievable, consider the following story about about a friend, whose tale I first told in the book referenced in my author’s bio. My friend, “Gideon” (not his real name), worked overseas for a small U.S. company. While on vacation in the U.S., he stopped by his employer’s Manhattan headquarters and, to his surprise, received a $400 bonus. A splendid gift, he thought, until he realized at the end of his trip that he had spent that $400 five times! Basically, every time Gideon went into a store or restaurant, he and his wife used that bonus to justify spending more money, i.e., “What the heck, we have $400 more to spend than we thought we had!””

We are still waiting to find out if we are getting a refund, and I do think we are mentally spending it in multiple ways. I see it going toward shelves in our family room, a new dishwasher and a camping trip, and it clearly won’t cover all those things. Also it would be nice just to stick it into savings.

So are you expecting a refund? What is your plan for it? Will you save it or spend it? Do you think you will spend more than you actually get back? Will it cause you to overspend?

33 comments Add your comment

Jeff

April 8th, 2013
5:41 am

Nohing “causes you to overspend”. If you over spend it;s because YOU wanted to, not because something else caused it.

Georgia

April 8th, 2013
6:19 am

We do spend impulsively, and it takes a real couch potato to resist going to the mall and spending money. Tax refunds are the enemy. I’m expecting about fifteen hundred dollars. Now, I could use it to pay down credit card debt, (about four thousand total), or I could use it as a down payment on a 60 inch TV. The TV is polling really strong at this point in the campaign, folks. Why would I commit such an irresponsible act of financial suicide? Because I’m a couch potato, (and a total idiot), and life is short and a new 72 inch smart TV is spending money on my world, you know? The pentagon blew a trillion on smart bombs. The bankers blew a trillion on smart derivatives. And they both got away with it, (the dirty rats). Well, I’m too wigged for reason to prevail. I’m getting the 80 inch smart 3D TV.

Word in, Peace out, blood.

Mayhem

April 8th, 2013
7:09 am

We will buy a new TV. We currently have a 46 inch, but we are upgrading to 55 or 60 inch. We’ve always gotten money back, sometimes we splurge, sometimes we don’t.

We view the refund as cashing out a savings account. Yea, I know the government is making money off my money, but I don’t care. It won’t make or break us. We are very financially stable and this is a little extra cash flow, so we spend it on something we like. This year, it’s a BIGGGER tv, and a mini vacation for the two of us. We are off to Charleston, SC for a couple of days in the next couple of weeks.

Bgb

April 8th, 2013
7:10 am

“Will it cause you to overspend?”

Of course, IT will be the cause.
Not week-willed women and impulsive purchases
Not a lack of understanding of investments or a solid understanding of math

Maximus Desimus Meridius

April 8th, 2013
7:21 am

Savings rate in this country is about 3%……meaning just about everyone overspends, refunds or not!

Maximus Desimus Meridius

April 8th, 2013
7:24 am

…..but that’s ok. Cuz when we’re ready to retire and have $23 in our savings account, Obama will give us all we need. “Live for today, the heck with tomorrow”

DB

April 8th, 2013
7:29 am

My husband takes it as a personal affront to his tax management skills if we have to pay more than $50 or $100 at the end of the year. Since a majority of our income comes from self-employment, he likes to manage it so that we don’t have any big surprises either way at the end of the year. To him, a large tax refund would be just as bad as a large tax bill, because it would have been money that we didn’t have the use of during the year. :-) We usually end up paying under $100 each year after all the accounting and quarterly payments, etc. have been finished — haven’t had a refund in years, so I don’t know what we’d do with one!

beth

April 8th, 2013
7:40 am

I love getting a big tax refund back. And yes, we do spend at least 50% of it. We usually put it into projects for the home, but this year, it will be used to pay for my daughter’s private testing for dyslexia. I already have next year’s return mentally spent on a new patio.

Me

April 8th, 2013
7:49 am

I honestly cannot remember the last time I received a refund and I make attempts to prevent providing the government with an interest free loan. With that said, however, I don’t mind those that actually receive a refund of money they EARNED and paid as taxes – the “wealth redistribution”, however, is something for which I take great exception.

Techmom

April 8th, 2013
7:57 am

No refunds for us… apparently the government thinks we’re rich. Bahahahahaha!

dc

April 8th, 2013
8:03 am

huge difference between “cause”, and “enable”. They might enable someone to overspend…the cause is still just what’s inside a person’s head or heart.

Mayhem

April 8th, 2013
8:09 am

Spread my work ethic, not my wealth.

Me

April 8th, 2013
8:19 am

@Mayhem — Concur fully!!

Scooby

April 8th, 2013
9:14 am

What refund.

Denise

April 8th, 2013
9:35 am

I put it in my savings account but “some kind of way” I end up “going to get it” for something. This year I’m saving up for a car down payment so I’ll be a little more diligent about it.

But I do have an example of money burning a hole in your pocket. My brother’s fiance just got a big windfall of $42K (legally! LOL). She has been unemployed going on 1 year and a family of 6 has been living off my brother’s salary which is shy of $35K. It would make sense for them to save the money for bills – at least the majority of it – for the just in case. They have needed to ask for financial help in the past like when my brother went on disability pay when he was in the hospital with a collapsed lung. So it’s not like it’s impossible that they’d need the money. She wants to spend it ALL on…who knows what and has not said the word “save”. My brother has hidden the money! LOL

usually lurking

April 8th, 2013
9:45 am

If I got a big refund, I’d put it in savings, and adjust my withholding for the next year accordingly. In reality, we usually end up owing federal about the same amount we get back from the state, so it ends up being a wash.

Mayhem

April 8th, 2013
10:55 am

@Denise – my SIL had her’s already spent before she even got the refund. She is a credit card junkie, and has already spent her refund. She will send her refund to the credit card companies. She is driving my brother in law to the poor house rather quickly. Why he doesn’t stop her I don’t know.

He is amazed we are debt free and not up to our eyeballs in credit card debt (they have over $20K in credit card debt) . I told him its because we ONLY have ONE credit card, and pay it off every month. I myself don’t like credit cards, but we have ONE and hubby keeps it in his wallet. I’m just fine with that, I prefer cash anyway.

atlmom

April 8th, 2013
11:17 am

weirdly, it didn’t post.
sorry if i’ve said this before.
we typically get a bunch back (b/c of a losing small business, and I can’t adjust my deductions any more).
I thought we’d get a bunch back this year – what with a smaller income and a move, etc – but we got back less than what we usually do.
We typically invest in the house (shutters, encapsulating the basement, etc) – but this year, I’ll just be putting it towards the money we borrowed for spiffing up the house we just bought. but it’s not so much money in the first place.
I don’t overspend ever – no credit card debt, only debt in the house. and a tiny bit at that. In any event, I know I am not a typical american.

Denise

April 8th, 2013
1:17 pm

Mayhem – my brother asked me if I needed any money (he’s overly generous) and I said “yes, the money I loaned you”. LOL!!! Better get it while they still have it. :-)

John Ellison

April 8th, 2013
2:05 pm

The more important question is “What makes politicians overspend our tax money.”

Common Sense

April 8th, 2013
2:37 pm

Unless you are one of the parasites that is getting welfare from the productive sector via the Earned Income Tax Credit, all of the money coming back to you is YOUR money in the first place. Spend it, save it, whatever makes you happy. But consider, by allowing the government to have your money (interest free) all year, you are further enabling their massive waste on illegal wars, foreign aid, etc. Be disciplined, give the government as little as you can each year without incurring a penalty, and send them what you owe no earlier than April 15th. Withholding (suggested by the conservative “hero” Milton Friedman) was imposed as a “temporary” measure during WW2 to insure that the government had plenty of money to wage war. Now it is your weekly enslavement to a behemouth with no spending limits or concern for the citizens.

lakerat

April 8th, 2013
3:27 pm

DB – we are like your husband – we try to not owe any taxes or have any refunds.

This year, however, since it was our first in total retirement, we were not able to adequately predict our income or control our tax burden; low and behold, we got a refund, which was enough to cover most of the outrageous expenses associated with our oldest son getting married this past weekend (and, there really is such a person as “bridezilla”)- so, we were not too put off that we had messed up this year…

DB

April 8th, 2013
3:31 pm

I’m waiting for some Administration wank to decide that tax refunds ought to be taxed as “windfall profits.” :-)

jan

April 8th, 2013
4:25 pm

Why would you want a big refund? Why give the government an interest-free loan of your money?

I try to make sure I am within $250 of our tax liability. This year we got back a whopping $8.

Granted, sometimes that is hard to do predict what your taxes will be if a life change occurs, but I still aim for being close to our tax liability.

RJ

April 8th, 2013
7:27 pm

I don’t see a thing. We use that check to pay our property taxes.

DB

April 8th, 2013
7:54 pm

@jan, I think we had to pay $14.87. He’s a happy camper, and it’s even more of a feat when you consider he’s balancing state income taxes in three states!

Kat

April 8th, 2013
8:17 pm

I’d love to earn so much money that getting a tax refund would be just as bad as having to pay tax. I understand the narcissistic aspect of it, but not the logic.

Just Me Thinking...

April 8th, 2013
9:24 pm

The only time we EVER got a tax refund is when we relocated for my husbands job. Usually, we just try to break even. When we did get one we just put it in savings. We might get one this year and I plan to do something I haven’t done in the almost 9 years my daughter has been on this earth. I’m taking a weekend vacation by myself. I think I’ll head down to Key West.

catlady

April 9th, 2013
5:50 am

What is a tax refund? Because I make a fair salary but do NOT have debt on my home, I don’t get a refund–no mortgage deduction! One of those times that being in debt would be GOOD!

I understand why homeownership is good, and I agree. However, that is a form of welfare, in my opinion. Why not give a tax break for NOT being beholden to the banks?

RJ

April 9th, 2013
10:10 am

My retired parents no longer get refunds either @catlady. I agree.

jmb

April 9th, 2013
10:56 am

RJ, same boat as you, use one tax refund to pay another.

Warrior Woman

April 10th, 2013
3:12 pm

@Kat – Your class envy is showing. Not wanting to give the government an interest-free loan has nothing to do with how much you make or narcissim. It has everything to do with your ability to use your money as you see fit instead of giving it to the government when you don’t have to do so. If you are capable of exercising self-control and sticking to a budget, there’s no reason to “save” by letting the government hold your money when you could actually earn interest on real savings in a private account.

Observer

April 10th, 2013
9:07 pm

Paid out the wazoo in taxes all year, took out maximum withholding. A refund? Will pay in almost $4k additionally.