Tax Time -- An Opportunity for Working Families to Build Assets

Blog Post
April 15, 2008

Although many people dread the April 15 deadline to file their taxes, for millions of working families, tax time represents a potential lucrative asset building opportunity. Families, who are eligible for the earned income and other tax credits, can receive a lump sum of several thousand dollars and there are a growing number of options to use this lump sum to build assets.
The Earned Income Tax Credit (EITC) represents the country's largest, most effective anti-poverty programs. Every year approximately 20 million workers claim about $30 billion through the program lifting five million of them above the poverty line. For many families, tax refunds are the single largest lump sum of cash received each year.

Many workers regard this lump sum as a forced savings strategy. The average income tax refund is approximately $2,000 and although many of these families need their refund to help pay for basic living expenses, the lump sum can also be used as an opportunity to save and build assets. The lump sum could be used to establish an emergency fund, to pay down consumer and other forms of debt, to fund the down payment of purchasing a home, or to build long-term savings.

It seems logical that tax time could be a powerful asset building opportunity, but most families have dedicated their tax refunds well before they receive them. Encouraging saving and asset building at tax time can be challenging; therefore, we need powerful products and initiatives that encourage savings at tax time.

Encouraging families to save part of their refund is a message that needs to be conveyed long before the day the person does their taxes and an easy mechanism for saving or investing needs to be in place. Over the last few years, there have been several efforts to develop mechanisms to help working families build assets including the ability to split their refund into different accounts, the promotion of saving bonds as an asset building option, and the development of a new product that enables working families to open accounts at tax time.

In the past, taxpayers who received a refund either had to deposit all of their refund into one account or receive a paper check. Now, the IRS allows taxpayers to split their refund into up to three different accounts enabling them to direct some money into an account for spending and direct the remainder into accounts to build savings.

Another strategy to help low income workers build assets at tax time is a pilot program to get taxpayers to purchase savings bonds. Doorways 2 Dreams (the D2D Fund) and their partners tested U.S. Savings Bonds as a saving strategy with encouraging results. In a study in tax season 2007, savings bonds were offered in 27 H&R Block offices. Over 300 tax clients bought nearly 500 savings bonds, with take up rates between 6.0% and 9.6%. Approximately 56% of bond purchasers reported no other savings and among those with other savings, 52% had less than $1,000 saved elsewhere.

The New America Foundation is launching a new idea that could help working families build assets by enabling them to open an account at tax time. The Assets and Transaction Account-or ATA-would allow tax refunds to be electronically deposited into individual ATA for tax filers who do not direct deposit their refund into another account or who do not opt out of the ATA. The refund would be bifurcated between a transaction and a savings account, with five percent automatically deposited into an interest bearing savings account. The New America Foundation is currently leading an effort to craft a federal policy proposal to deliver an ATA at tax time.

Split refunds, the promotion of savings bonds, and the ATA are examples of products and strategies being explored to help low income working families begin to build assets. These products provide mechanisms to make it easier and more convenient to use a portion of tax refunds for asset building opportunities and although we need more time to evaluate their impact, early findings are encouraging.

We need to further encourage families to take advantage of these opportunities. Providing financial education that helps families to understand the importance and impact of saving and that increases the awareness of these products is important and should be delivered well in advance of tax season. We also need to explore communication and messaging strategies that resonate well with working families in order to promote these asset building opportunities effectively. There are now a growing number of options to help working families to begin to save and build assets at tax time and our next challenge is to develop strategies to help more families utilize the opportunities so they begin to build assets and achieve financial stability.