It’s that time of year when I — and other tax specialists — nag, I mean encourage, you to adjust your withholding so that you don’t get a big refund.
Our argument generally focuses on getting that money now as part of your regular paycheck so you can use it to pay for holiday spending instead of charging those gifts and paying the bill later with your tax refund.
One group of tax experts, however, says we should instead encourage folks to save their refunds even before they get them each filing season.
Millions of refunds, billions of dollars
That’s probably a wiser approach. After all, Americans love their tax refunds from Uncle Sam. The IRS says that through Oct. 30, it had issued almost 109 million refunds that totaled nearly $299 billion.
The average federal tax refund check was $2,746.
The Refund to Savings initiative is a research project by the Center for Social Development at Washington University in St. Louis, Duke University and Intuit, the maker of the popular tax software program TurboTax.
The Refund to Savings, also referred to as R2S, looks at the taxpaying and saving behaviors of hundreds of thousands of people using a special tax software program. The software version used, TurboTax’s Freedom Edition, is available for free to individual filers and active-duty military members who meet certain earnings limits.
Based on data from those filers, the R2S believes it can help bolster individuals’ finances by suggesting these filers save their tax refunds before they actually get the money.
Savings suggested at filing time
When people complete their tax returns, note R2S researchers, the money is there, but it’s not quite in the filers’ hands. By offering taxpayers a choice to save at that key decision point, the study believes it will get more savers because the intent is still fresh and the desired option is convenient.
“When filers are asked how they want to receive their refund, we inject motivational messages, suggesting they save for emergency, retirement or another long-term goal,” Michal Grinstein-Weiss, a professor at George Warren Brown School of Social Work at Washington University, told The Wall Street Journal. “We also suggest the amount they should save.”
The IRS already gives taxpayers the option to have their refunds sent to checking, savings or retirement accounts. All you have to do is check a box on your 1040, enter the account number and the money will be directly deposited as instructed. You can even divide your refund among various accounts.
The R2S effort simply encourages such savings actions.
Suggestions for VITA filers
The effort is detailed in a recent R2S report, of which Grinstein-Weiss is a co-author, prepared for volunteer tax preparers who help filers each year at all Volunteer Income Tax Assistance, or VITA, sites. VITA workers help lower income taxpayers prepare and file their annual returns at no cost. The 2015 filing season threshold is $54,000 or less.
“If one of your VITA clients decided to save his or her refund, or even part of it, it could prevent a potential financial hardship for them and their family,” notes the R2S report. “Or, perhaps better, it could be the start that enables them to do things they may have thought they never could: buying a house or sending a child to college. Encouraging your clients to save a portion of their refund could have a profound impact in their lives.”
Refund savings for all
I believe R2S is on to something here. And it’s an approach that should be taken by all taxpayers who get refunds, regardless of income.
Everyone needs to have some cash set aside for a special goal or for emergencies that always crop up.
As long as people are using tax over-withholding and the subsequent refund amount as a forced savings mechanism, we should do all we can to ensure that the money actually does transfer to a savings account.
Do you get a refund every year? Have you ever had that refund directly deposited to a savings or other account? Have you considered adjusting your withholding so that you’ll get the money in your regular paychecks?