taxes

How Americans will spend their tax refund

The taxman cometh

While 24 percent of survey respondents believe they owe taxes, it's unlikely that all of them will end up writing a check to Uncle Sam, based on data from the IRS. Last year 82 percent of returns got refunds at tax time.

"They may find that when they do their taxes, they will not owe," says Kay Bell, Bankrate's contributing tax editor and author of "The Truth About Paying Fewer Taxes."

"There are so many new tax breaks for this year. Earned income tax, education credit, the sales tax deduction if you bought a car, energy incentives -- I think that they may not realize that they can apply some of these," she says.

How do you plan to pay the additional taxes?

Will you adjust your paycheck withholding to avoid a big refund next year?

Paying up

Of those who owe the government money, four out of 10 say they are not prepared for the added expense.

Despite that, six out of 10 Americans (63 percent) who owe additional taxes plan to write a check straight from their bank accounts. Only 6 percent say they will need to borrow money. Another 17 percent plan to set up an installment plan with the IRS.

"That comes at a cost. You have to pay interest, plus there is a late payment fee every month and a user fee just to set up the installment plan," McBride says.

Rethinking refunds

Not everyone relishes the idea of giving the government an interest-free loan all year long. In fact, one-fifth (19 percent) of those who expect or who received a refund say they adjusted or plan to adjust their withholding to get a smaller refund next year.

"It's good to see people adjust their withholdings, but it is probably because they need the money now to meet their day-to-day living needs," says Bell.

"Hopefully when the economy picks up, they will still be able to do that and take the little bit extra and put it into savings throughout the year," she says.

Though withholding too much money makes little sense financially, many people enjoy getting a large refund check, viewing it as a kind of forced savings account.

But that practice isn't viewed as a smart move by experts.

"Most are not going to adjust their withholding," says McBride. "Seventy-five percent of those who are employed are likely to give the government another interest-free loan this year," he says.

Though the "bonus" may seem nice, Americans don't need to wait until tax time to pay down debt or save. By giving the government only what is owed and exercising financial discipline, taxpayers can have free use of their money all year long.

Results are based on telephone interviews with a nationally representative sample of 1,002 adults, age 18 and over. The interviews were conducted from March 18-21, 2010, under the direction of Princeton Survey Research Associates International. Interviews were conducted on both landline and cell phones using random digit dial (RDD) sample. Sample demographics were weighted to match population parameters derived from the Census Bureaus' 2009 Annual Social and Economic Supplement data. The overall margin of sampling error is plus or minus 4 percentage points for results based on the total sample. Results based on smaller subgroups are subject to larger margins of sampling error. In addition to sampling error, the practical difficulties of conducting surveys can also introduce error or bias to poll results. For full results and methodology, download this PDF.

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