Low Earners Save Their Tax Refunds

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Cash-strapped workers understandably are tempted to spend their tax refunds, a sort of financial lifeboat that floats by once a year.

Financial experts see the windfall as something more: an ideal opportunity to sock money away. Yet only about 10 percent of low-income workers save their refunds, even though doing so could prevent the financial dominoes – past due bills, late rent payments, or delayed car repairs – from falling. These are common outcomes when their spending gets out of whack.

Past experiments that tried to encourage cash-strapped low earners to save had modest success. A novel research study looks for clues to what motivates them by examining who spends the refund versus who saves it. The central finding in a Journal of Consumer Affairs article: the people who saved had put some thought into predicting the size of their refunds at the time they filed their taxes. This held true whether their estimates were accurate or not.

The act of estimating in advance “appears to be a form of planning,” said the researchers, University of Rhode Island professor Nilton Porto and Michael Collins, director of the University of Wisconsin’s Center for Financial Security.

Porto said they don’t know the reason estimating leads to saving, but he had one idea. The connection between the two could stem partly from the taxpayer having some advantage, such as financial skill or superior knowledge – in short, they might have higher financial literacy.

The vast majority of low-income workers get a refund, compliments of the Earned Income Tax Credit (EITC).  The EITC is federal financial assistance in the form of a credit for parents and single people with incomes below the guidelines.

In the study, clients who visited tax preparation offices run by the national Volunteer Income Tax Assistance (VITA) were asked to fill out a form that included these questions: how big a refund do you expect, and do you want to save it?

Answering them proved key to identifying who saved their refunds, because they tended to be the same people who made the upfront estimates. Half of the 4,000 VITA filers who provided estimates came within $250 of their future refunds.

Less subtle but also interesting was that taxpayers who intended to save would more frequently follow through. African-Americans in the study, for example, more often planned to save their refunds and did.  Men usually didn’t plan on it – and less often saved. Parents and grandparents, in a twist, didn’t make plans to save refunds but were more likely to anyway.

This study, by uncovering the importance of the initial refund estimate, may shine light on a promising new pathway for other disadvantaged Americans to save a little.  “Encouraging consumers to focus on estimating their income tax refunds may be an important component” of financial counseling, Porto and Collins concluded.

Readers might be interested in a 2014 blog about the IRS’ Savers Tax Credit for low-income workers, which remains in effect.

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Financial behavior tendencies are usually ingrained early in life. If one is inclined to save, that interest stretches out through the years and encourages financial literacy.

Others, whose money burns a hole in their pocket, are often doomed to repeat their flagrant spending. Success in getting them to save can only succeed if they show an interest.

I have a nephew who is in constant financial turmoil. Attempts to offer viable solutions to his dilemma are met with negative reaction. There is always the excuse to maintain the status quo.


Loved this analogy of the financial lifeboat that floats by once a year. It’s so true for many people. I’d always regarded taxes as a form of forced savings that prevents me from being my own worst enemy by frittering it away little by little without making any difference. My husband says that’s like giving the government a free loan. For me, it’s worth the price.

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