The recent financial crisis and subsequent recession had a debilitating effect on the wealth of many American families. In a report produced by the Federal Reserve Bank of St. Louis, it was estimated that household wealth declined 26 percent from its peak in 2007 to the trough in 2009.1 Not surprisingly, low- and moderate-income (LMI) families, who were already struggling financially prior to the crisis, were among the hardest hit. In 2008, nearly 30 percent of low-income families had zero or negative net worth.2
Until recently, research on household balance sheets, or the savings, assets, and debts of households, focused primarily on family earnings. However, more attention is now being directed toward the role that assets play in providing financial stability for households. Families that are “liquid-asset poor” do not have the financial safety net to weather emergencies and, as a result, experience more hardship following negative financial shocks than those with assets. In addition, asset-poor families miss out on the financial benefits that are gained from having assets. Although balance sheets can be repaired by using a variety of asset-building strategies, this article focuses on programs that promote savings at tax time due to the inherent advantages of the tax preparation process.
Because tax time is both universal and recurring, many nonprofit and government agencies have found it valuable to structure savings programs around the moment of tax preparation. A federal refund can amount to as much as one-fifth of a tax filer’s annual income, especially for those eligible for earned income tax credits (EITCs) and other credits, so tax time represents one of the few opportunities in which LMI individuals can realistically set aside savings for themselves and their families.
In the past decade, organizations across the country have launched innovative tax-time savings programs to motivate LMI families to save part of their lump-sum refund. Three notable programs are highlighted below.
The New York City Office of Financial Empowerment (OFE) launched the $aveNYC pilot program in 2008 to encourage saving at tax time and help LMI residents become more financially secure. Specifically, the program offered tax filers a 50 percent match on a portion of their tax refund to encourage them to set aside money for short-term goals, including paying down debt and building an emergency fund. To be eligible for the match, participants must have opened a risk-free, no-cost savings account at select Volunteer Income Tax Assistance (VITA)3 sites in the city and maintained the initial deposit for one year. During the three-year pilot, approximately 2,200 tax filers saved an average of $561, and 80 percent maintained their deposit for the full term.4 The initial success of $aveNYC led to the expansion of the program in 2011 to Newark, NJ; San Antonio, TX; and Tulsa, OK.
Now known as SaveUSA, the program continued through the 2013 tax season, and its final match distribution was set for February 2014. To determine whether SaveUSA helped improve household financial stability and cultivate long-term saving habits for LMI families, the OFE has partnered with the Manpower Demonstration Research Corporation (MDRC)5 to evaluate the program. Thus far, the preliminary results are encouraging: Despite having average annual incomes of less than $20,000, roughly two-thirds of the participants maintained their initial deposits for the full year.6
Another program that promotes tax-time savings is the SaveYourRefund sweepstakes, which was launched by the Boston-based nonprofit Doorway to Dreams (D2D) Fund in 2013. The national program encourages LMI tax filers to save a minimum of $50 using IRS Form 8888, which allows them to directly deposit a portion of their federal refund into a savings account or use their refund to purchase U.S. savings bonds. Registrants are entered into weekly drawings for cash prizes and are also eligible for a $25,000 grand prize. In the first year of the sweepstakes, 772 entrants saved an average of $896, representing approximately one-third of their total refund. A follow-up survey of both entrants and nonentrants also showed that SaveYourRefund raised awareness of Form 8888, as 74 percent of the program participants reported never having heard of the form prior to entering the sweepstakes.7 D2D will continue the program in 2014 and hopes to enroll even more participants.
In 2005, the nonprofit Corporation for Enterprise Development (CFED) launched the Self-Employment Tax Initiative (SETI), which is aimed at assisting the 13 million self-employed individuals in the United States who are earning less than $50,000 annually.8 The purpose of SETI is to help low-income self-employed individuals grow their businesses and take advantage of tax-based asset building opportunities. Specifically, the national initiative awards grants to VITA programs that provide free or reduced-cost tax preparation services to ensure that self-employed workers receive the maximum number of tax credits for which they are eligible. To date, SETI has partnered with more than 40 organizations across the country and has awarded more than $500,000 in grants. The initiative continues to conduct research to identify optimal ways to serve self-employed workers.
Although significant progress has been made in recent years to encourage LMI households to save at tax time, plenty of opportunities for growth still remain. More than 26 million tax filers received nearly $62 billion in EITCs for the 2012 tax year,9 and innovative tax-time savings programs are the key to helping these individuals rebuild their balance sheets.