Tax Time: How Families Manage Tax Refunds and Payments

Abstract

Every spring, more than a half trillion dollars flow into and out of the financial accounts of American families as they reconcile taxes paid against taxes owed for the prior year. The JPMorgan Chase Institute analyzed daily financial flows and balances for families who receive tax refunds or make tax payments in order to understand the impact of tax reconciliations on families’ financial lives. We examined inflows, expenditures, net savings, account balances, and credit card balances to provide a comprehensive view of how families manage positive cash flow from tax refunds and negative cash flow from tax payments. The report leverages high-frequency, de-identified financial data from a base sample of 8.3 million families who used a Chase checking account to receive a tax refund direct deposit or make an electronic tax payment in 2015, 2016, or 2017. Our analysis uncovers six key findings illustrating how families manage tax refunds and payments. First, we observe that four-fifths of our sample received one or more refunds and made no payments. Refund recipients tended to have lower average incomes and smaller cash buffers than those making tax payments. Second, among participants in our sample, tax refunds amount to almost six weeks’ take-home income for the average family receiving them. For families making a tax payment, the average payment is equivalent to 2.5 weeks’ income. Third, for families receiving average expenditures increase sharply as soon as the refund is received. Six months after the refund, families still have an average of 28 percent of their tax refund remaining. Fourth, we find that expenditures on durable goods, credit card payments, and cash withdrawals increase most sharply upon receipt of a tax refund. We also observe families that make tax payments and find that families for whom the refund has a larger cash flow impact increase their spending and saving most sharply when it arrives. Additionally, on average, families who make a tax payment cover that payment with cash already available when it is due. Once the payment is made, spending and saving patterns quickly return to their previous steady state. Taken together, our findings indicate that the tax system is a primary tool by which many families generate lump sums of cash and that tax refunds are a major financial event that resets the spending and saving patterns of families who receive them.