Guest Blog Post: Outsized Impacts at Tax Time

Editor’s Note: This guest blog post is contributed by Krista Comer, a Project Director at the Center for Social Development at Washington University in St. Louis.

As we rapidly approach the April 15^th tax filing deadline, many people find themselves scrambling to finish (or start) their tax returns. But those of us who have already filed and received a refund may be experiencing a little peace of mind knowing that part of it is tucked away in bank accounts for when we really need the money.

The Refund to Savings (R2S) initiative is helping more tax filers do just that using simple savings promotions in the TurboTax Freedom Edition (tax prep software offered free as part of the IRS Free File Alliance) made possible through a collaborative effort between Washington University, Duke University and the Intuit Tax and Financial Center. The simple but smart interventions are working. The recently released report on 2013 R2S shows that many of the tax filers reached chose to save some portion of their tax refund. In fact, this group of tax filers deposited almost $6 million more into savings accounts than they would have without the intervention.  And, importantly, many of these households still have at least part of their refund savings six months later.  

You may be wondering, “So what? We all need to think about saving more, right?” True, but a few points make R2S especially promising. First, the R2S interventions are specifically helping low-income households to do more with tax refunds. The average household participating had an income of just $14,566 and few assets. Tax filers in this population likely face the biggest challenges in creating their own safety net, and yet the evidence suggests they are indeed using the tax refund to do so.

Second, the intervention makes very small tweaks in the TurboTax Freedom Edition software. During the interview process tax filers see screens with a saving message and are defaulted to save part of their refund by using the IRS form 8888 to “split” their refund. These tweaks do not delay the taxpayer’s filing experience and there are no incentives for choosing to save (although the Doorways to Dreams Fund is running a great pilot on incentives). In fact, it is actually more difficult to choose to save, not only because you don’t get to spend the money, but because mechanically it takes more steps vs just sending the full refund to your checking account. Still, these small, simple savings interventions are making a difference both in terms of increasing saving and how households perceive their financial situations. 

Third, while the individual level of refund saving is modest, that stashed cash makes a big difference when an unexpected opportunity arises or when a family needs the cash to get by. Without emergency savings the potential for financial crisis is high; two-thirds of R2S survey participants experienced a financial shock, such as a period of unemployment or major vehicle repair, in the six months following tax filing. Savings—even small amounts—can have an outsized impact on the financial security of a family and open up a variety of opportunities.

The bottom line is that resource constrained households are saving their refunds. We see that even small, simple changes to encourage saving help, and that accumulated saving matters in the financially volatile lives of low-income families. The R2S team is using these insights—along with hard data from R2S experiments and detailed longitudinal surveys with tax filers—to reimagine the tax refund and make it go further for families.