Improving saving behaviors at tax time, online and in person

By Meredith Covington, Project Director, Center for Social Development, Washington University in St. Louis

Saving for a rainy day or retirement can seem like a lofty goal if little or no money remains at the end of the month, and a 2015 study revealed over 40 percent of American households have insufficient funds to subsist at the poverty level if emergency expenses arise.

So how can we encourage households to save if they are struggling just to meet day-to-day expenses? Tax time offers one answer. Some researchers have described the tax filing season as the “golden moment” for its potential to facilitate saving and other healthy financial behaviors.

A tax refund is the largest infusion of funds many households receive in a year. In 2014, the average federal tax refund was $3,170 per household. This considerable financial boost is equivalent to the median cost of rent for 3 to 4 months, 12 to ­15 weeks of groceries for the average family of four on a moderate-cost food plan, or over a year and half worth of gasoline for the average U.S. household. Refunds can enable low- and moderate-income households to pay down debt and fix or purchase assets like cars and homes. The tax refund is also a potential source of savings for those same households. In short, tax refunds provide many households an opportunity to engage in sound asset-building practices.

Recognizing the importance of this opportunity for many families, leaders in academia and the tax industry have launched efforts to facilitate and improve household saving behavior. One such initiative is the Refund to Savings (R2S) experiment. By encouraging people to save part of their federal tax refund and making it easy for them to do so, R2S aims to improve the economic security of low- and moderate-income households. Researchers from Washington University in St. Louis and Duke University are working with Intuit, Inc., the creator of TurboTax software, to devise, test, and evaluate scalable interventions. Low- and moderate-income tax filers participate in the R2S experiment by using Intuit’s free tax-preparation software, TurboTax Freedom Edition.

In addition to R2S, many other groups have come up with innovative ways to give low- and moderate-income households incentives to save. Several of these efforts operate through Volunteer Income Tax Assistance (VITA) programs. Like TurboTax Freedom Edition and the R2S experiment, VITA programs offer people free assistance in completing their tax returns, but in-person. By helping to maximize the size of their returns, such efforts put money back into the pockets of individuals and families, make it easy for them to save at tax time, and enable real asset-building opportunities at no cost to the tax payer.

R2S helps low- and moderate-income households to save as they file their taxes online

In early 2013, approximately 680,000 low- and middle-income tax filers participated in the R2S experiment by filing their taxes online via TurboTax Freedom Edition. Of those, 20,816 filers also responded to an invitation to take a detailed R2S Household Financial Survey, which examined filers’ intended use of tax refunds, product preferences, behavioral characteristics, and demographic traits as well as the assets and liabilities of the filers’ households. Six months later, nearly 8,500 of those survey respondents participated in the second wave of the Household Financial Survey and reported on the use of their refunds.

The R2S research team estimated that the experiment’s interventions led an additional 4,800 tax filers to deposit some portion of their refund into a savings, and the rate at which filers split their refund, allocating part of it to savings, approximately doubled as a result of participants’ exposure to R2S. The R2S interventions increased the total amount saved by almost $6 million. Further, the R2S interventions continued to affect the probability of saving and the percentage of the refund saved for at least 6 months after participants filed their taxes. The success of the interventions has prompted the R2S team to conclude that simple, low-touch messages can substantially increase the number of people who deposit a portion of the refund to savings at tax time.

Select VITA sites also help low- and middle-income households to save at tax time

Although VITA sites promote saving by providing free tax preparation, some directly encourage saving by offering filers savings vehicles. The VITA programs offered by three organizations serve as examples of such encouragement.

Tax time presents an opportunity for households to secure savings. Evidence from the R2S initiative and several VITA sites shows that low- and moderate-income households can and will save if aware of savings opportunities at tax time. To continue improving saving behaviors among such households, policymakers should invest further in innovative tax-time savings products and programs such as the Consumer Financial Protection Bureau’s Ready? Set, Save! Campaign and its current initiative with H&R Block