Filing a tax return often leads to eager anticipation of a refund. For many, this money feels like an unexpected bonus, even if it is actually their own money being returned to them. What do people choose to do with this refunded money?

A decision by the US Congress back in 2001 offers some clues.

That year, they passed a tax cut bill that returned $38 billion to 92 million American households in the form of $300 to $600 tax �rebate� checks[1]. The expectation was that taxpayers would spend these rebate checks and stimulate the sluggish economy.

However, a survey found that only 22 percent of households intended to spend their rebates. Most planned to put the money toward paying down debt (46 percent) or savings (32 percent)[1]. Insofar as the goal of the one-time rebate was to jump-start the economy, the program was a flop.

But this shouldn�t have been surprising: People are usually frugal when it comes to tax refunds. A poll found that 58 percent of respondents planned to either save or pay down debt with their annual refund, while another 26 percent intended to use it to pay for necessary expenses. Only 7 percent of people surveyed planned to use their checks for something fun[2].

Why is this?

Partly, it�s necessity. For most of the year, many working people struggle to pay bills and save money. Refund season offers a rare chance to play catch-up.

But psychology is also at play. It turns out, the way you think about your tax refund can have a big impact on what you do with it. And, the words typically used to describe the money��refund� or �rebate��cause you to think about it in a way that makes you more likely to hoard it.

We know this from experiments in which people receive money described as either �returned income� or �bonus income�[3].

For instance, in one experiment, college students were given $50 that was described as either a �tuition refund� or �bonus income.� A week later, those in the �refund� condition reported having spent only $9.55 of the $50, while those in the �bonus� condition reported having spent more than twice as much�$22.04!

The way a past refund is described even affects people�s memory of what they did with it.

In an experiment in 2001, people were asked about what they had done with the $300 to $600 rebate they had received just 6 months earlier. For some, the money was described as a �rebate,� just as the US Congress had described it. For others, the money was described as a �bonus.�

Those in the �rebate� condition reported having spent only 25 percent of the money�close to how much people had actually spent. But those in the �bonus� condition reported having spent 87 percent! That is, a difference of one word caused people to misremember whether they had saved or spent the money.

Why do these framing effects happen?

When a refund is described as a rebate, people perceive it as a return to their previous state of wealth. But when it is described as a bonus, they perceive it as a gain in their wealth[3]. Changing one word triggers a completely different mindset: someone who would have stingily saved their money becomes someone who freely spends it.

You can take advantage of this phenomenon in your own life.

If you are trying to save more money, don�t think of a tax refund as an unexpected bonus. Instead, focus on how you paid all of that money out of your paycheck throughout the year, and how the money you�re getting back was yours all along.

But if you�ve been sacrificing and saving up all year, and could use a treat, do the opposite: By focusing on how you�re suddenly getting money you didn�t have before, you can use a tax refund as a nice occasion to splurge on yourself.

?References

1. Shapiro, M.D. & Slemrod, J. (2003). “Did the 2001 tax rebate stimulate spending? Evidence from taxpayer surveys.” NBER Chapters, in: Tax Policy and the Economy, 17, 83-110. National Bureau of Economic Research, Incorporated.

2. Steiner, S. (2017). How Americans will spend their tax refund. 2017 Tax Guide. bankrate.com.

3. Epley, N., Mak, D., & Idson, L.C. (2006). Bonus of rebate? The impact of income framing on spending and saving. Journal of Behavioral Decision Making, 19, 213�227.