Pay Dirt: Tax refund: Spend or save?

For many Americans, the tax refund used to be like an early Christmas present. After getting that check in the mail, it was off to the mall for a shopping spree.

The first time I did my taxes, the refund wasn't much -- $300 or so. But, hey, it was $300 I didn't have before. So I spent it all. I went out and bought myself a brand new high-definition TV.

But that was back in the good old days of 2008. Things are different now. With the economy the way it is, tax refunds are becoming less of a pleasant surprise and more of a much-needed way to pay the bills.

A recent national Harris survey commissioned by ING DIRECT showed 51 percent of American taxpayers need their refunds for basic commodities -- that includes 65 percent of respondents younger than 35.

Moreover, 71 percent of surveyed Americans said they'll save their refunds or pay off debt instead of spending them.

At AccountAbility Minnesota (AAM), which prepares free tax returns for individuals making less than $30,000 or families making less than $45,000, a majority of customers say they're using part of their refunds to pay off bills or debt.

AAM offers individual tax preparation as well as an Express Refund Loan and Savings program, where people can get their federal refunds in as little as one to two business days. They also partner with credit unions and banks to help customers open free savings accounts.

Sweidan sees a wide variety of people seeking tax help, from people who have been filing for years to college students to recent high school graduates filing for their first time.

To many burdened Minnesotans, AAM offers an easy solution in an uneasy time.

"A couple of people have lost their jobs, and they come to e-file to get money quicker," he said.

Sweidan himself is changing his refund habits this year. A full-time student with a part-time job, Sweidan will use this year's refund to pay off credit-card debt -- the first year he's had to do that.

"I tend to use the 'buy-now-pay-later' model," he said. "And the later is now."

Bigger returns possible

There is some good news on the tax front. A March report released by the Internal Revenue Service showed taxpayers are receiving larger refunds this year. As of March 20, the national average refund was $2,740 -- a 10 percent increase over the same time last year.

The IRS said taxpayers are likely benefitting from the Recovery Rebate Credit (RRC,) the first-time home buyer credit and other tax breaks.

Younger taxpayers have even more chances to increase the size of their refund. People who can no longer be claimed as a dependent can qualify for the RRC -- a credit for people who didn't get an economic stimulus payment last year.

New parents can also get an additional $300 through the RRC, since any child born or adopted in 2008 would not have been on the previous year's return. And the IRS has more than $17 million in unclaimed refunds for Minnesotans who didn't file taxes for 2005.

"That's driving people to come in and file their taxes, especially young people," said Eva Song Margolis, a financial services partnership manager at AAM.

Many taxpayers younger than 30 are working parents who are using the refunds to buy school supplies or save for Christmas presents. Margolis said she sees a lot of happy faces when they see how much money they're getting back, especially from younger taxpayers.

"They're really happy when they see they're getting back $4,000 or $5,000," she said. "[They say,] 'Woo hoo! I just got paid five paychecks.'"

So in the face of economic disaster, people are saving their refunds instead of going on a shopping spree. Taxpayers have begun to change their habits and started to think of their refunds in a long-term sense.

"You want to spend less and save your money," Sweidan said. "Because you don't know if you're going to be working next week."