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Tax-Refund System Hinders Savings in U.S.

Tax refunds seem to reduce workers’ financial security by encouraging them to spend money rapidly instead of building their savings.

Every spring, Americans reconcile their taxes, determining how much they actually owed to the Internal Revenue Service and how much they paid throughout the previous calendar year. Typically, Americans pay more taxes than they owe. The IRS says it sends refunds to more than 80% of taxpayers, averaging around $2,800 per refund. Although Americans may enjoy the moment when they get their refund, does lending money to Uncle Sam (at no interest) throughout the year and collecting it every spring hinder workers from achieving their financial goals?

After examining data from Morningstar’s HelloWallet division, I have come to the conclusion that the tax-refund system hinders Americans’ ability to achieve their financial goals. Guidance on how to effectively allocate refunds could be enormously helpful for many U.S. workers.