This article first appeared in the St. Louis Beacon, Feb. 6, 2013 - What are you planning to do with your tax refund this year?
Researchers at Washington University are hoping that you’ll save at least part of it for those unexpected financial emergencies -- loss of income, car repairs, medical bills -- that can push fragile household finances into the red.
Tax refund time offers a prime opportunity to get that message out, says Michal Grinstein-Weiss, associate director of the Center for Social Development at the university’s Brown School, because there is truth to that old saw: There is no escaping death or taxes.
About 145 million individual tax returns will be filed this year, according to the IRS.
"The saving rate is at the lowest it’s ever been, and the key is to find a time where everyone can save -- and a time that an infrastructure exists when you can reach millions of people,’’ she said.
The goal over the next few months is to reach 1.2 million American households with an initiative dubbed "Refund to Savings” that offers taxpayers a process to designate at least a portion of their refunds for savings when they file their returns. The "Refund to Savings" program has been woven into Intuit’s TurboTax’s Online Tax Freedom Edition, which is free for low-and moderate-income taxpayers. The project is a collaboration of university researchers, including Washington University, and Intuit, the parent company of TurboTax.
Grinstein-Weiss points to a sobering statistic: About half of U.S. households couldn’t scrape together $2,000 within 30 days to pay for an emergency expense, according to a study by Harvard and Princeton researchers. The lack of a “rainy day fund” can drive those families into a downward spiral of high-interest credit card or payday lending debt.
According to TurboTax analysts:
- About $230 billion will be refunded this year to taxpayers, and about 40 percent of them are living paycheck-to-paycheck.
- The average tax refund in 2012 was $2,700.
- Just over 40 percent of early tax filers said they plan to use their tax refund to pay down debt and cover everyday costs, such as rent, food and utilities.
- Another 25 percent of filers said they planned to save at least some of their refund.
Grinstein-Weiss recognizes that many low- and moderate-income Americans depend on their refunds to pay down debt, but she is hoping to convince them to consider channeling the refund through a savings account and then to target how it is spent. Depositing the refund directly into checking -- or cashing it immediately -- can mean that it is easily diverted for general expenses.
More on U.S. savings
* A research report from Pew suggests that Americans try hard to save but fall short.
* St. Louis Fed economists explain why the mortgage crisis was a savings crisis.
"We are not encouraging people to save their entire refund but to create an effort of savings,’’ she said. “If you put it aside with a plan -- to pay this medical bill -- it’s more targeted. And maybe there will be some left over to create a cushion.’’
Grinstein-Weiss said a goal of the initiative is to develop national policy to help the economically vulnerable build financial security -- and a plus of the tax refund program is it doesn’t require a big investment from government. Her research, so far, has shown that Americans are receptive to saving at least a portion of their refunds.
"People are interested in saving money -- and that’s true for low- and middle- income and poor, alike,’’ she said. "This is a critical moment for intervention: The money is yours, but it’s not in your hands.’’
Grinstein-Weiss will be one of the presenters at a symposium this week "Restoring Household Financial Stability after the Great Recession: Why Household Balance Sheets Matter” sponsored by the St. Louis Fed and Washington University. National financial and academic experts are meeting to share research on the fragile state of U.S. household finances.
