Save tax refunds, or help save retailers?

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Many people take their refunds and shop for cars — or get repairs on what they have.

Many people take their refunds and shop for cars — or get repairs on what they have.

It’s tax refund season. And even though local financial advisers recommend their clients sock away the extra cash, it’s a good time of year for Colorado Springs retailers.

Nationally, 75 percent of Americans have received or will get a tax refund, and the Internal Revenue Service estimates that the average refund this year will be $2,800. That’s nearly 75 percent of the average person’s monthly salary — not bad for a chunk of change most people see as “extra money.”

While 44 percent of respondents to a Capital One Bank Survey said they didn’t plan to spend their tax refunds at all in 2013, retail sales historically surge during tax refund season, generally the last week or two of February through the first two weeks in April. Retail sales increased 17 percent during tax season in 2012, according to a report from MSN Money, and they’re expected to climb even more this year.

Locally, Colorado Springs collected almost 20 percent more sales tax revenue from March economic activity than from February spending in 2012.

“Tax refunds are funny because most people think of it as house money,” said Tim Watson, a certified financial planner and vice president of Strategic Financial Planners.

“And they’re more likely to spend it because they don’t feel like they earned it.”

The good advice

But they did earn it, he said. And he tries to remind clients of that.

If clients have paid off their high-interest consumer debts, his go-to suggestion is a Roth IRA, which serves as a retirement account investors can draw from tax-free because they’ve already paid taxes on the money they invest in it.

If Watson’s clients have already maxed out their Roth IRA contribution, the next step could be a college savings account like a 529, which allows contributors to take a state tax deduction for deposits, he said.

Of course, saving and investing comes after the debt is paid off, Watson said.

That’s the same advice Greg Shafer, a certified public accountant and CEO of The Shafer Group, gives his clients.

The first priority is always debt, he said. Pay off credit cards, cars and make extra payments on mortgages. That’s the order he recommends clients go in. If they’ve already worked through all their debt, then it’s time to save.

“Most people heed our advice because they are very uncertain about this economic environment, “ Shafer said. “They’re anxious about our economy and our country.”

Of course, he admits that a lot of his clients need the money they get from their refunds just to get by.

They aren’t thinking of it as “extra” at all, but are planning to fold it into everyday spending.

Nationally, even those who plan to save tend to spend a little more than they would and treat themselves to a little something like shoes, a nice dinner or a vacation.

“It’s hard to get over that emotional response,” Watson said. “Some of the bigger refunds — it’s almost like a windfall. You think, ‘what fun stuff can I do with this $4,000?’”

Spending it

While Watson said that about 90 percent of his clients are “responsible with their refunds,” he admits many probably spend a little more than they would if they didn’t get a refund.

And that’s exactly what local retailers bank on to pull them out of the sluggish post-holiday months.

“We absolutely see an increase in sales this time of year,” said Jason Love, sales manager for Daniels Long Chevrolet. “And we increase our inventory based on that trend.”

Between early February and the end of March, he said sales increase 15 to 20 percent and most of the people shopping on his lot say they’re planning to use their tax refunds toward their car purchase.

City sales tax figures for 2012 showed that there was a 6.66 percent increase in automobile sales from February to March.

“We see the biggest increase in cash customers looking for something in the $7,000-or-less range,” Love said.

Those kinds of used cars have been hard to find the last couple years in an extremely tight used car market. But they’re even harder to get this time of year and dealers and customers often end up paying a premium for them, Love said.

“This is also the time of year when parents start buying their kids cars for college and that kind of thing, too,” he said.

People buying new cars usually say what they can afford to buy depends on their tax refunds because that’s where they will get the down payment, Love said.

Those who can’t afford new cars, take their old ones in for repairs.

Key indicators

Auto repair shops and car rentals increased 12.05 percent from February to March in 2012, one of the biggest increases of any economic sector the city measures.

“We get a huge influx of business this time of year,” said Jim Lewis, manager of Aspen Auto Clinic. “They’re taking care of things they’ve put off all year.”

He said people usually bring their cars in for big-ticket maintenance items like timing belts.

“Sometimes people will bring their cars in for inspection and take care of whatever they need,” he said.

People are also quick to spend on luxury electronics, said Michael Fallert, general manager of the Sound Shop. He sees a 10 to 20 percent bump in business during tax refund season.

“They’re looking for flat-panel TVs,” he said, “bigger ones over 50 inches. That’s the hot item.”

And he said plenty of people readily tell him their tax refund brought them in to shop.

While furniture sales historically fall off between February and March in Colorado Springs, American Furniture Warehouse owner Jake Jabs said it’s usually a good time of year for his stores.

“I was just down at the Colorado Springs store last weekend,” he said. “And — oh man — the traffic. We’re going to set a new record this March.”

He said March is usually a good month for luxury sales. People tend to treat themselves to the nicer leather sectionals and recliners and other higher-end items this time of year.

Jabs said he advertises a little extra between late February and late March, but doesn’t usually offer additional savings.

“All we really say is, ‘American Furniture Warehouse is the best way to spend your refund,’” he said.

And it seems to work.

What financial advisers suggest consumers do with tax refunds

Pay off high-interest consumer debt like credit cards

Pay off personal debt on things like cars or student loans

Make extra payments on the mortgage

Save in a Roth IRA

Put money away for children’s or grand children’s college

What people plan to do with refund money

22 percent of survey respondents plan to use their refund to pay down debt.

16 percent may save their refund.

4 percent plan to invest their refund.

Of those who are going to spend their refund:

30 percent will spend it on everyday necessities.

23 percent will be going on vacation.

15 percent will be splurging on electronics.

Source: Capital One Bank survey of 1,000 households