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Once people are finished deliberating over which deductions they can claim, they can start dreaming about how they’re going to spend what is often a fat refund check from the federal government.
Through late March, the Internal Revenue Service said it had doled out more than $206 billion in tax refunds, with the average check coming in at more than $2,800.
For many, it’s the largest chunk of cash they’ll get all year. It’s only human nature, experts say, for that to lead to some temptations.
“You get 20 bucks, you’re not thinking all the things you can buy with it,” said Gbenga Ajilore, who is an economics professor at the University of Toledo. “But you get a $2,000 check, that opens up the possibilities of things you could conceivably buy.”
Still, most Americans say they don’t plan to splurge on new iPads or rare wines. Instead, they’re focusing the extra cash on lowering debt, fattening their savings accounts, or simply paying household bills.
An annual survey by the National Retail Federation found that 38 percent of Americans expecting a refund this year plan to use it to pay down debt, while just 11 percent plan to make a major purchase, such as a car, new furniture, or pricey electronics.
The most common answer was simply to save it.
Since the Great Recession, Mr. Ajilore said people seem to be paying closer attention to their savings and debt levels. That bears out in the NRF survey. This year’s survey found the highest percentage of people planning to save and the lowest planning to make big purchases in the last eight years.
“I see most clients wanting to pay off high-interest debts from credit cards [or] medical bills,” said Jaimee Weaver, tax partner at Gilmore Jasion Mahler Ltd. in Maumee. “As you’re looking at your own personal financial goals, paying off the high-interest things have to be your top priority.”
That’s what Perrysburg resident Eric Sowinski has done for the last few years. Any extra cash went toward things such as credit-card balances and car loans. Now, the 26-year-old only has a car loan, student loans, and a mortgage
That freed him up to use this year’s refund check to finally get rid of the wood paneling and outdated carpet in his 1970s basement.
“I got a sizable refund back, enough to where I could actually do the remodel and not come out of pocket a whole lot,” Mr. Sowinski said.
Mr. Sowinski had a busy year in 2013, getting married and buying his first home. Most of the house had been updated, but the basement remained in all its vintage glory.
“As soon as I got my tax refund, I gutted it,” he said. “I put all my money into Lowe’s and Home Depot. Everything went back into the economy.”
Economists say refund checks can help perk up the economy, though it’s tough to put a figure on how much.
“Local economies do notice when the refunds come in,” said Chris Christopher, an economist with IHS Global Insights. “Beauty salons do a little better. Cars do a little better. A lot of retailers and outlets have that in their minds as [refunds] come in.”
Measuring the overall effect of tax refunds on the U.S. economy is more difficult to untangle, especially coming out of a cold winter that much of the nation experienced.
Home-improvement stores have been performing well, but much of that can be attributed to people preparing for and cleaning up after late-winter storms.
Auto sales also were up in March, but that could be because people who planned on buying in January or February were kept away by snow and ice. The spot on the calendar where Easter falls also can affect consumer spending.
“It’s really hard to say how much the tax refunds are helping versus just the winter, the positive payback if you will, because things were colder in January and February,” Mr. Christopher said. “It’s tough to take those other things out.”
Jeff Podgorski, sales manager at Appliance Center in Maumee, said refund checks do provide a nice boost after the winter lull that follows Christmas. Often, he said, people will browse ahead, promising to come back in to buy as soon as their checks come in.
“People are going to get that major appliance they’ve been needing, they’re going to treat themselves to that bigger new TV or that kitchen remodel,” Mr. Podgorski said.
Experts say spending a tax refund isn’t necessarily a bad thing, as long as what it’s spent on fits into one’s overall financial goals.
“I don’t think there’s a right or wrong way. Everybody’s personal circumstances are different,” said Sharon Speyer, president of Huntington Bank’s Northwest Ohio Region. “It’s important to have goals, a plan to achieve your goals, and to utilize that money the best way to complement what you’re trying to do.”
Ms. Speyer and others say people should consider setting tax-refund money aside to pay for emergencies if they don’t already have such a fund established.
“There are surprises in life. After a winter like this you’ve got people who have had damage to their roof, people who needed a new furnace,” Ms. Speyer said. “You can have a great plan, but you need to be able to take care of those things that pop up.”
Most experts say people should have three to six months’ worth of expenses stocked away. Ms. Speyer also suggests investing for retirement or making contributions to a tax-favorable college savings account.
Based on the National Retail Federation’s survey, putting some cash away is at the top of many people’s minds. The group found 46 percent of people said they intended to save at least some of their refund. Younger people were the most diligent savers, the survey found, with 58 percent of those 18 to 24 saying they plan to save at least some of their refund.
“If you can be a bit more future-oriented and see the value of doing with a little less now so you can save and build up money for down the road, that’s generally a smarter financial plan,” said Catherine Montalto, an associate professor of consumer science at Ohio State University.
Still, it’s often those who plan to save who slip up, even if it’s just a bit.
“Even the people who are financially responsible have that urge to go out to dinner or buy that dress,” said UT’s Mr. Ajilore. “There’s a psychological thing because it’s not the income you get every two weeks. It’s like you hit the lottery.”
Perhaps the best way to check yourself is to remember that tax refunds aren’t a free bonus — even though many of us think of them that way.
“A tax refund is almost like you made a loan to the government,” Ms. Speyer said.
“It’s your money the government is giving you back,” she said.