Survey: Americans prefer tax refunds to bigger paychecks

Tax time is approaching, and with it you can expect the return of a perennial piece of tax advice: It is better to minimize your weekly tax withholding than to receive a refund because it allows you to put your money to work faster. According to a new survey though, most people defy that particular piece of advice -- and there might be a method to that majority's madness.

On behalf of MoneyRates.com, Op4G surveyed more than 1,100 American workers who were in a position to determine their regular paycheck withholding. The poll found that most prefer getting a refund come tax time over maximizing their paychecks. Some details on what people do with their money, and on the current interest rate environment, may help explain why the people who prefer a refund might actually be acting sensibly.

Refunds vs. bigger paychecks

By adjusting the W-4 form your employer uses in calculating paycheck withholding, you can usually dial your amount of tax withholding up or down. Again, experts often say that the ideal is to manage your level of withholding so it equals your likely tax bill as closely as possible. That way you will get as much take-home pay as possible in your regular paychecks without owing money come tax time.

However, the MoneyRates.com survey found that people choose to ignore this advice by roughly a 2-to-1 margin: Sixty-eight percent of respondents who are in a position to adjust their withholding prefer to receive a refund, compared to 32 percent who prefer to minimize withholding.

What people do with the money

Does this mean that people are being foolish, or at least inefficient, with their money? Not necessarily. When you look at what people do with the money, it seems there may be some value to getting a refund.

While 31 percent of people who prefer refunds spend most of those refunds when they receive them, 46 percent of those who minimize withholding spend the extra money they get in their paychecks. This means that 69 percent of those who prefer a refund save half or more of that refund, compared with 54 percent who save the extra money they get each paycheck from a minimized withholding level.