Why Millennials fear tax season(Read article summary)
More than 80 percent of Millennial tax filers fear some aspect of preparing their taxes, the highest of any age group, according to a recent NerdWallet and Harris Poll survey.
Susan Walsh/AP Photo/File
Millennials may be glued to their screens and social media feeds, but when filing tax returns, these digital natives are more likely to turn to paper than any other age group, a NerdWallet survey finds.
Surprisingly, millennials — taxpayers in the 18- to 34-year-old age group — report a higher rate of mailing paper returns (17% versus 8% among taxpayers ages 35 and older), according to an online survey commissioned by NerdWallet and conducted by Harris Poll of more than 1,600 U.S. adults who filed taxes last year and plan to file taxes this year.
The survey finds millennial taxpayers worry about preparing their taxes — 80% report concerns such as making a mistake, not getting a full refund or paying too much (compared with 60% of adults ages 55 and older), among others. About a third (34%) of millennial taxpayers turn to friends or family with questions instead of tax professionals (27%) or online sources (20%).
“Who knew so many millennials would be so old-fashioned?” says Liz Weston, NerdWallet columnist and personal finance expert. “But in some ways, it makes sense — millennials tend to have less experience with a deeply confusing tax code, less cash to seek professional help and less need for the more complicated returns that having children or a mortgage can bring.”
Plans for refunds
Our survey found that millennials and older age groups all agree in one area. The number of American taxpayers who believe they should save or invest their refund this year has increased compared with the number who actually did so last year. About 4 in 10 taxpayers who received a refund last year say they saved or invested the cash; however 54% who expect to get a refund this year believe they should invest or save the windfall.
Americans who can afford professional advice during tax season can flirt with danger when hiring a tax preparer. Just under half (49%) of taxpayers who hired a tax professional to do their taxes last year didn’t ask some very basic questions — such as about certification — of their tax preparer.
“Only four states have regulations for tax preparers,” Weston says.
“As the Pew Charitable Trust points out, ‘independent preparers are less regulated than hair stylists,’ a profession that requires licenses nationwide,” she says. “So in this buyer-beware environment, consumers need to ask the right questions.”
Millennials: Uncertain and old-fashioned?
The survey finds that the most popular method of filing taxes last year across all ages groups was tax software programs like TurboTax, TaxAct or H&R Block: 36% of millennial taxpayers used this method, compared with a 35% average for all age groups.
But millennial taxpayers were more likely than any other age group to file a paper return: 17% of younger taxpayers tucked their returns in the mail, compared with 8% among taxpayers ages 35 and older.
- Thirty-four percent of millennial taxpayers say they ask tax-related questions of friends or family — instead of a tax professional (27%), online sources (20%) or the IRS (9%) — a rate nearly twice as high as the national average of 19%. Nationally, 38% of taxpayers turn to a tax professional, followed by friends and family and online sources at 19% each, and 10% contact the IRS with tax-related questions.
- Millennial taxpayers were much less likely than the average to hire a tax professional (17% versus the national average of 29%).
- Fears surrounding tax preparation are common across all age groups: Nearly 7 in 10 taxpayers (69%) have a concern about tax preparation. The top concern is making a mistake (17%), followed closely by paying too much in taxes (15%) not getting the biggest possible refund (14%), and getting audited (11%).
- Millennials are more worried about taxes than other age groups: Four of five (80%) millennial taxpayers report fears related to tax preparation — such as making a mistake (22%), not getting the biggest possible refund (17%) or paying too much in taxes (13%).
- Among those who received a refund last year, 1 in 5 millennial men (19%) say they aren’t confident that they got the maximum refund possible, compared with just 5% of men ages 45 and older who aren’t confident.
“Millennials have the most concerns about taxes, but unless their friends and family are accountants, turning to loved ones for tax advice is the least reliable source for accurate, up-to-date information,” Weston says.
Refund: Save, splurge or invest?
As a group, more taxpayers say they will save or invest their refunds this year compared with those who did so last year. We asked taxpayers how they spent any refund last year, and what they plan to do this year:
- 41% of those who received a tax refund last year say they invested/saved it; however, 54% of those who expect a tax refund this year believe they should invest/save it.
- 50% of those who expect a tax refund this year say they should save it, compared with 37% of those who received a refund last year and saved it.
- 7% of those who expect to get a tax refund say they should invest their refund in the stock market, compared with 5% who did this when they received a refund last year.
- Yet among those who expect a refund, more people than last year say they should spend it — 34% want to spend it on a vacation, home improvements or splurging at the store, compared with 31% who received a refund last year and say they spent it.
Of those who got a tax refund last year*
- 37% of taxpayers saved it
- 5% invested in the stock market
- 38% paid off debt
- 31% spent it on a vacation, home improvements or splurged
Of those who expect a tax refund*
- 50% plan to save it
- 7% plan to invest in the stock market
- 41% plan to pay off debt
- 34% plan to spend it on a vacation, home improvements or splurge
* Note: Survey respondents were asked to check all that apply, so figures don’t add up to 100.
“The response shows how we are often torn between what we want to do with our income tax refund versus what we feel we should do,” Weston says. “But the results generally show Americans have the right idea about tax refunds — our priorities should be first paying down high-interest debt, then boosting our savings.”
Still, investing is the best way for taxpayers to grow their cash. For example, the average refund last year was just under $2,800. With long-term investments averaging a 7% return, that figure would nearly double in 10 years to about $5,500 if invested.
“Those who have the discipline and patience to invest refunds will reap greater dividends down the line,” Weston says.
Accounting for your accountant
Among those who hired a professional to file last year’s taxes (29%), a third (33%) asked the question: “Based on my situation, what tax deductions do I qualify for?”
In the survey, 23% say they asked their tax professional “Would you represent me in the event of an audit?” And 1 in 5 asked “What is your certification?” and “Have you ever prepared returns similar to my tax situation?”
But only 8% asked all of these questions before hiring their tax professional, while 49% of taxpayers asked none of these questions.
“You can’t assume tax preparers know what they’re doing,” Weston says. “At the very least, you should make sure yours has a Preparer Tax Identification Number, which is now required by the IRS, and an appropriate certification.”
NerdWallet’s tax refund advice
Getting a refund? Here’s NerdWallet’s recommendations to prioritize tax refund spending:
- Pay high-interest debt first, such as credit card bills.
- Put money in an IRA or other retirement savings account.
- Build up an emergency fund.
Consider whether you should be getting a refund. By adjusting your withholding, you could have more money in each paycheck to pay down debt or boost your savings.
“Getting a refund isn’t the worst thing in the world, but you probably have better things to do with your money than giving Uncle Sam an interest-free loan,” Weston says.
File tax returns electronically. “E-filing is safer and it’s more accurate, since the electronic filing process catches a lot of errors,” Weston says. “Plus, you get your refund faster.”
This survey was conducted online by Harris Poll on behalf of NerdWallet from Jan. 20-22, 2016, among 2,046 U.S. adults ages 18 and older. Of the total surveyed, 1,643 Americans filed taxes last year and plan to file taxes this year. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables, contact firstname.lastname@example.org.
This article first appeared at NerdWallet.