In 1789, Benjamin Franklin penned a letter to a French scientist named Jean-Baptiste Leroy. “In this world nothing can be said to be certain, except death and taxes,” Franklin wrote.
Centuries later, this idiom remains true. While we all acknowledge the certainty of taxes, there’s value – and we think Ben would agree – in understanding the human aspect behind them, to focus on the whys behind people’s tax-time behaviors. For instance: do people employ a specific, even ritualistic, yearly tax strategy? And if so, what is the philosophy or mentality underpinning that strategy? What will they choose to do if they receive a refund or have to pay, and why?
With April 18th, Tax Day, days away, and taxes being top-of-mind for every American, we asked more than 750 consumers from across the country about their tax strategy and behavior. By listening to how consumers approach their tax preparations, filing strategies, and point of views on refunds, we gleaned a handful of insights that go beyond simply when and how they file.
Regardless of how consumers file their taxes (e.g., on paper, tax software, a tax accountant), we discovered five strategies and underlying mentalities driving their choices and behaviors.
1. Hoping it’s BIG
Individuals employing this “strategy” (if you want to call it one) typically don’t pay much attention to their taxes other than at the filing stage. Their tax-time mentality is simple: the bigger the refund the better. Rather than take an active, strategic approach to filing their taxes, many will use self-service providers, like TurboTax, to guide them through the filing process and help them maximize their refund. It’s their yearly tax “routine,” and if they receive a larger return than in previous years, they are thrilled.
To these consumers, tax refund equals free money. It’s an annual bonus they depend on, and they spend it as such. Vacations, home improvements, major life events (such as weddings), or other big ticket items are common refund splurges. Often, these spend areas are earmarked in their yearly budgets well before the refund hits their bank accounts.
2. Making it BIG
There’s another group of individuals who want to achieve the same outcome (get as big of a return as possible), but for an entirely different reason. Rather than passively file their taxes, they take a proactive and strategic approach, doing all they can, all year long, to lower their taxable income and ensure they get the largest refund possible. This approach takes many forms. For example, these individuals will adjust exemption claims (e.g., reducing 1 to 0), max out IRAs, contribute to pre-tax health savings accounts, or employ tax write-off strategies such as charitable donations.
Instead of spending their tax return windfall immediately on a new flat-screen TV or dishwasher, these strategic and calculated individuals seek investing and savings products that will grow their return for long-term benefit.
The remaining three strategies each have the same goal: to neither receive a refund nor owe any money. As a result, behaviors in regards to refunds (if any) are similar. The nuanced difference between the groups is in the underlying mentality for breaking even.
3. Playing it safe
These financially savvy consumers don’t want to be in a position where they owe the government any money. They acknowledge that ideally they’d like to come out net-zero, but they would also opt to receive a refund on the smaller side at the expense of breaking even.
As a result, many of these consumers will slightly overpay on their taxes. Maintaining a consistent income throughout the year – versus earning a few extra dollars per month in bank account interest – combined with the knowledge that they won’t owe any money come April gives them peace of financial mind.
4. Putting my money to work
Fiscally shrewd, these consumers also want to neither receive nor owe any money after filing their taxes. They prefer to receive their money as they earn it (vs. the government holding it until they issue a tax return), and they manage that money wisely.
Their strategy is about the long game. It’s about investing one’s own funds in real-time in order to earn interest and grow over the long-term. One consumer explained this mindset: “Our investment accounts grew at about 15% last year, so I’d rather have my money there than with the government…especially 20 years from now when it’s made a huge difference with compounding interest!”
5. Sticking it to Uncle Sam
These consumers also want to break even come tax time, and they acknowledge the loss of potential interest earned throughout the year, but for another reason entirely. They don’t want to give the government a “free loan.” They are more concerned with who their money is being used by rather than what they are missing out on by not having access to it throughout the year.
Money is an intensely personal and emotional thing. And, every April, Tax Day brings that truth to light. Inside that truth is nuance. That’s why understanding consumers’ tax strategies and their underlying mentalities is so important. It gives insight into why people behave how they do when it comes to saving, spending, and planning. And it gives us a better sense of both their decision making processes and the pain points they experience – not just come tax time, but all the time.