A tax refund is essentially an interest-free loan from you to the government.

Tax refund time is a major cash-flow event for many U.S. households. Past JPMorgan Chase Institute (JPMCI) research has shown that a tax refund was “the single largest cash infusion of the year for 40 percent of American families”.

More than three in four taxpayers get refunds, and the average amount they get back is close to $3,000, according to IRS data. That means that for many Americans, their annual refund is the biggest single check they’ll get all year.

Key tax season takeaways ascertained from JPMorgan Chase Institute research entitled “Will this tax season be a boost or bust?”:

• Roughly four out of five (~78%) of filers receive refunds during tax season.
• The average tax refund is equivalent to nearly 6 weeks pay.
• Tax refunds are essentially zero interest loans by taxpayers to the federal government.
• Tax refunds are perceived as forced savings (at zero interest) by most taxpayers.
• Taxpayers spend tax refunds differently than they spend regular salary and wages.  Studies show that many taxpayers use refunds to pay off high interest credit card balances.
• Historically, families depend on the cash infusion from tax refunds to fuel spending. Cash withdrawals, durable goods purchases, and credit payments all increase by 85 percent or more in the week after a tax refund.
• Families use their tax refunds to meet basic needs, such as healthcare expenses and groceries. Families increased expenditures on out of pocket healthcare costs by 60 percent in the week after tax refund receipt.

Diana Farrell, founding president and Chief Executive Officer of the JPMorgan Chase Institute

It’s important to understand that the tax refund check you receive from the government is the byproduct of your overpaying on your taxes. Getting a refund means that, throughout the year, you paid more of your income in taxes than required by law to the IRS, and after you file your tax return, the IRS returns your money (or overpayment) back to you.

But losing that money for months and months cost does you something — goods and services you were not able to buy (and hence benefit from), investments you didn’t make, debt you didn’t pay down, savings you did not accumulate, etc.

Nearly 40 percent of American households carry a credit card balance, and those loans carry high interest rates. . . If instead of getting a $3,000 refund come April, you’d been able to pay off $250 in credit card debt each month (or put $250 a month less on your card), you would have avoided more than $300 in interest expenses by Tax Day.

A tax refund is essentially an interest-free loan from you to the federal and state governments.

References:

1. https://www.jpmorganchase.com/institute/research/household-income-spending/tax-time-fy22
2. https://fee.org/articles/tax-refunds-your-interest-free-loan-to-the-government/