Tax season can be stressful and time consuming for accounting professionals as well as consumers. If you're an accountant, knowing how your clients spend their federal and state income tax refunds can help you provide more effective financial advice in the coming year.
As the end of the 2014 tax season draws near, many consumers have received their federal and state income tax refunds. If you don't feel comfortable asking your clients about specific spending plans, you can look to data collected by national organizations.
In 2014, as in many other years, the majority of Americans who receive a federal or state income tax refund plan to use it to improve their financial situations. A recent survey from TD Ameritrade found that 21 percent of respondents intend to use their tax refunds to reduce debt, while 61 percent plan to put at least a portion of the refund into savings or an investment account. Since the average refund is up to $3,000 in 2014, according to KING5 Seattle, many consumers will have the opportunity to make significant financial strides.
Though your clients' intentions may be positive, their actions may tell a different story, however. Many people, even those who plan to save their state income tax refund, end up spending more than they anticipate. According to data collected by the National Retail Federation for the year 2011, 11.9 percent of Americans used their refunds to help pay for a vacation. Another 13.2 percent made a major purchase, while 29.7 percent of people used their refunds for everyday expenses.
The rapid tax refund service offered by many tax preparers can make it difficult for consumers to follow through on their original goals. In many cases, refunds are deposited directly into a checking account, making the funds available immediately. If a consumer doesn't immediately move the money to his savings account or use it to pay down a debt, it can be easy to let plans slide. As a result, the original amount slowly erodes away, leaving the consumer with less money to put toward savings and debt.
For accountants, the national data indicates that at least some clients may be planning poorly throughout the year. If your clients are using their federal and state income tax refund checks to cover everyday expenses, it can mean that they are not budgeting effectively. In anticipation, you can help prepare your clients to use their rapid tax refund deposits responsibly. A simple "how to handle your refund" email can be a good reminder. You might also add refund-planning services to your regular tax preparation packages. In many cases, a gentle push for responsibility can be enough to encourage better spending habits.
By staying aware of your clients' spending habits—and nationwide trends—you'll be better prepared to help them deal with their federal and state income tax refunds. As a result, your clients can enjoy a more stable, predictable financial state throughout the year.
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