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Tax Day in April can be one of the most dreaded days of the year, unless you’re receiving a refund. With 55% of taxpayers relying on a refund this year, according to the latest MagnifyMoney survey, some are already making plans about what they’ll do if they do get one.
We surveyed 1,550 Americans, finding that 41% of consumers are planning to put their refund into savings and 39% are hoping to use it for debt payments.
But there’s a chance plans go awry over misconceptions about what’s taxable income and what isn’t. Let’s look closer at this year’s tax season.
The majority of taxpayers (55%) are relying on a refund this year, up from 40% last year.
For parents with kids younger than 18, the percentage relying on a refund jumped to 72%.
What do these hopeful consumers plan to do with a refund? As in previous years, many consumers would use their tax refund for savings (41%) or debt payments (39%).
The percentage who said they’d put their refund in the stock market nearly doubled, from 8% in 2020 to 14% in 2021. Additionally, nearly a quarter (23%) would use a refund to pay for necessary household expenses, such as rent or groceries.
“If you don’t have an emergency fund, starting one should be the highest priority for your tax refund,” said Ken Tumin, DepositAccounts founder. “If you also have high-interest debt, like a credit card balance, you might want to use the tax refund to both start an emergency fund and to pay off the high-interest debt.”
If you have a well-funded emergency fund and don’t have high-interest debt, think about using at least some of your tax refund to add to your retirement and long-term investing accounts, he said.
Understandably, some taxpayers may be struggling financially because of the coronavirus crisis and not be able to put money into savings or toward large financial goals. If that’s the case, Tumin recommends creating a budget and tracking expenses to determine how you can:
Noteworthy: Married couples should be on the lookout for IRS changes this year, as 28% of married taxpayers who file jointly and worked in 2020 may be in for an unpleasant surprise when filing. The IRS changed withholding forms in 2020, yet 17% didn’t know that and another 11% had heard about the change but didn’t make any changes.
Some consumers have misconceptions about what is and isn’t taxable income — and these tax misconceptions can lead to costly surprises.
Nearly two-thirds (64%) didn’t know unemployment benefits are taxed as income — including 68% of those who were laid off or furloughed — and a similar percentage (62%) thought smaller wages like tips or bonuses weren’t taxable.
|Consumers have misconceptions about what is and isn't considered taxable income — here's the verdict|
|Percentage of taxpayers who believe this is taxable income||Whether it's taxable income|
|Smaller wages like tips or bonuses||38%||Yes|
|Funds withdrawn from a retirement savings account||33%||Yes|
|Monetary gifts||20%||No, unless more than $15,000|
|Tax refund from last year||19%||No (federal); depends (state)|
Source: MagnifyMoney survey of 1,267 taxpayers, conducted Feb. 19-22, 2021. Respondents selected all answers they believed to be taxable income.
There were plenty of tax misconceptions, especially when it comes to stimulus checks and unemployment benefits. Almost a quarter of taxpayers (24%) thought the recovery impact checks were taxed as income — which isn’t true.
Common tax misconceptions that Tumin comes across when speaking with taxpayers surround extensions and retirement savings accounts.
“An extension does not grant you more time to pay your taxes,” Tumin said. “It only gives you more time to file your return.”
He also noted that funds withdrawn from a retirement savings account can have a major impact on your retirement savings since you could be subject to a 10% tax penalty, in addition to being taxed as part of your income.
Only those who are self-employed are able to take those deductions, but 40% of non-self-employed remote workers think they’re eligible to deduct home office or business expenses on their tax returns.
Almost half of consumers (49%) have made a mistake on their taxes before — and 68% said mistakes ended up costing them.
If you’re hoping to get a refund as quickly as possible, note that how you file can lead to delays. It’s rather surprising that 17% of taxpayers are planning to pay by mail, despite the IRS urging them to file electronically to avoid delays.
To lower their tax bill, about 70% of taxpayers took some sort of action this year with the intent of bringing the amount they owe down. This included donating to charity (28%), contributing to pretax retirement accounts (25%) and adding money to a health savings account or flexible spending account (15%).
Generation X had the most contributors to pretax retirement accounts at 37%, followed by:
Many Generation Xers — ages 41 to 55 — are growing closer to retirement age, so it makes sense. While some baby boomers are even closer to retirement, many within the age group have already retired.
Deductions: More than 6 in 10 (63%) consumers take the standard deduction, but that may not be the best option available to them. Despite this, only 15% of taxpayers said they first calculate how much they’d be able to deduct by itemizing instead, allowing them to take whichever would allow for a larger deduction.
Meanwhile, some people seek help filing their taxes to try reducing their tax bill.
A large majority of taxpayers (90%) get help when filing their taxes, primarily through an online tax filing service (41%) or a paid accountant (36%). Baby boomers are most likely to do their taxes entirely themselves.
Owing money to the IRS can cause complications. For example, nearly a third (32%) of parents with kids younger than 18 would have to take on debt if they owe the IRS money this year. Here’s a closer look at respondents overall.
If you owe taxes and don’t have the savings to pay them, Tumin suggests using the IRS’ short-term or long-term payment plans to help you pay your bill, as they will likely be a better option than paying with a credit card or personal loan.
“At the very least, request an extension and pay as much as you can,” Tumin said. “This can reduce underpayment penalties and interest. Don’t just ignore the tax deadline.”
If you’re part of the 69% of parents with kids younger than 18 or the 66% of those laid off or furloughed amid the coronavirus pandemic still waiting to receive some of their economic impact money, here’s some good news: There’s still time to get your hands on it.
More than a fifth of consumers were not aware that they can file a recovery rebate on their tax return to claim stimulus money they haven’t received. So if you feel you were supposed to receive it but didn’t, make sure to take advantage of this tax return feature.
MagnifyMoney commissioned Qualtrics to field an online survey of 1,550 Americans, conducted Feb. 19-22, 2021. The survey was administered using a non-probability-based sample, and quotas were used to ensure the sample base represented the overall population. All responses were reviewed by researchers for quality control.
We defined generations as the following ages in 2021:
While the survey also included consumers from the silent generation (defined as those 76 and older), the sample size was too small to include findings related to that group in the generational breakdowns.