A new study from the JPMorgan Chase Institute documents how tax refunds impact American families’ income, saving, and spending habits. The research examines data from 2015-17 and shows that tax refunds are a “major financial event” that effectively “resets” the spending and savings habits of the families that get them.
Amar Hamoudi, one of the report’s co-authors, says that the impacts of a tax refund go beyond 6 months, and into the following year.
“There are two types of impact,” he says. “Their daily spending patterns — even by a couple of bucks — is higher. And [the second], the amount of cash they have on hand. Their checking account balances are about 11% higher than when they received [their refund].”
“When you file,” he says, “if you get a lot less than [prior refunds], what you spend is lower this year. That could end up happening.”
But, he adds that he expects families will “adjust to the new normal.”
The report shows most Americans use their refund as a savings tool, either purposely or not. They point to the opacity and complexity of the tax system for inspiring this type of behavior. Underwithholding can cause taxpayers to owe a balance to the IRS, which could take some by surprise and cause problems for their families.
“Even in a steady state world it makes sense why people would tilt the scale towards getting a refund,” says Greig.
A ‘watershed’ moment
According to the report, 80% of those studied received a tax refund to the tune of 6 weeks’ take-home income — roughly 10% of their yearly take-home pay. For households saddled with a tax bill, that payment equated to 2.5 weeks’ income. In the study, JPMorgan Chase Institute analyzed financial data from over 8 million families who used a Chase checking account to either receive a tax refund direct deposit, or make an electronic tax payment.
"The receipt of a tax refund is a watershed financial moment for many American families," said Diana Farrell, president and CEO of JPMorgan Chase Institute, in a statement.
Hamoudi says that tax refunds serve as a “reset” to a family’s budget.
But why? According to Greig, tax time can provide “financial clarity.”
“They see it all in one place: ‘Wow, this is how much I earned last year,’” Greig says. “So they know relative to last year how things will go. It also seems like people get information about their financial circumstances through tax time.”
And with a lump sum delivered at once, tax refunds are like disposable income enable families to immediately spend.
In the week after a refund arrived, family spending jumped nearly 75%. Families also doubled their spending on durable goods — items like home appliances, furniture, and tools — from $25 to $50 in a typical week. This was especially true for Americans with lower cash balances, who the report says timed durable good spending around their refund.
But tax refunds don’t just make Americans spenders. It also impacts saving habits.
“On average,” the study says, “families use a fifth of their refund to pay down bills – mostly bills from past consumption, including credit card and healthcare bills.”
A lasting impact
But 6 months after receiving a refund, the report says the average family still had 28% of their refund remaining.
By holding on to the refund, families were able to boost their spending. Throughout the year family expenditures increased, settling to a new steady-state of 7% higher than the pre-refund steady-state.
“During this time frame we observed a strengthening economy and some growth in wages,” Greig says. “So in some sense it’s no surprise we see slight upticks over time after the tax refund, because we are studying this in a time of macroeconomic growth.”
Greig says it’s encouraging to see so many families holding onto their refund, instead of blowing it all at once. But, she adds, instead of saving only 28% of their refund 6 months later, why not 50%?
“If this is the main vehicle people use to accrue saving, they are spending it at a faster clip than if they wanted to use this as their savings mechanism.”
Both Greig and Hamoudi point out that while tax refunds do enable families to save 10% of their take-home income, it doesn’t provide families the cushion they need throughout the year in case of emergency.
“How do you give people the nudges to save throughout the year for that buffer or just be able to make sure they’re paying down the full balance of their credit card bill each month and not accruing revolving credit card debt?” Greig asked. “This initial year could be painful, especially for early filers.”
But, Hamoudi points out, there is no better tool than a tax refund to force people to save over a short period of time — without penalizing them for receiving their money afterwards.
“This isn’t a great tool,” he says, “but there isn’t a better tool.”
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