Your Tax Refund And The Psychology Of A Windfall
Pop quiz: Do you think of an IRS refund as 1) a windfall 2) rebate or 3) your hard-earned money you are rightfully owed?
I know, most of us are often so relieved when we don’t have to write a check, we forget about examining a precise view of any balance due from the IRS after filing our taxes. And while there’s not necessarily a “right” answer, turns out how we regard that refund could very well determine how we treat it — including whether we spend, save or invest it.
Welcome to tax refund season, when millions of us will collect a payment from the IRS. This occurs each year despite a chorus of advisors routinely recommending the better economic choice of tweaking our withholdings to provide us with greater cash flow throughout the year and avoid what is essentially a free loan to the IRS. That is the logical, sensible, most economically sound choice. Yet most of us simply don’t do it: the average federal tax refund clocks in at roughly $3,000. Indeed, nearly 300 million people were so eager to receive their refund in 2016, they tracked its progress with the “Where’s My Refund?” tool, according to the IRS.
Why the disconnect between what we should do and what most of us actually do? Kit Yarrow, a consumer psychologist, ascribes the behavior to a combination of motivations that could include the common desire many people share in attempting to avoid writing a check in April, or as a savings tool and to enjoy the pleasure of a perceived windfall. “They use it as an enforced savings plan,” Yarrow says. “There are other people that look at it as a windfall rather than their money... people do tend to spend that more liberally than they do money they think of that they earned.”