Question: Why Do Close to 80% of People Overpay Their Taxes and Then Get Refunds?

Loading up on tax ideas which seems appropriate with April 15th deadline looming…So, why is it that almost 80% of tax filers find themselves receiving a tax refund (average this year of about $2,800)?  Some might wonder if it is a government conspiracy to overwithhold while others might wonder if this is a backdoor way for people to save (or splurge).

So, what say ye tax experts (from Marketplace.org)?

  • Peace of mind:  “CPA Rich Sotta in Portland, Oregon, says a lot of his tax-preparation clients intentionally have too much withheld, knowing from prior years’ experience that they will get a substantial refund—often several thousand dollars or more. “It’s so they don’t have a huge tax bill they have to pay in April,” says Sotta. “It’s peace of mind, knowing that they’re getting refunds.” He says some taxpayers want a buffer in case their tax situation changes and their tax bill goes up unexpectedly—for instance, if they have sources of income that fluctuate year-to-year.”
  • Plan to make a big ticket purchase:  “That predictable April refund windfall can be used by taxpayers to make a big-ticket purchase, take a vacation, pay down debt or build savings.Hersh Shefrin, a professor of behavioral finance at Santa Clara University, says research shows that most taxpayers who receive refunds do indeed devote a substantial portion to intended uses like this, rather than splurging and spending most of it right away.”