Promoting Financial Security at Tax Time

Come January each year, millions of American households prepare to file their income taxes. Financially vulnerable households—who may have limited or no tax liability and/or qualify for tax credits—commonly file for and are due tax refunds. In 2017 the IRS issued more than $300 billion in refunds, which represents a huge volume of funds flowing through the financial system and the economy. At the household level, these refunds are often the single largest lump sum people will receive all year. This significant windfall, happening at the same predictable time each year, presents a unique opportunity for financially vulnerable people to build financial security.

Tapping a wide range of perspectives, Commonwealth conducted research to better understand the opportunities and challenges for achieving large-scale, positive impact on people’s financial lives at tax time. After conducting secondary research, interviewing subject matter experts, and convening an advisory group, we uncovered promising directions for future efforts. Several themes include:

  1. Defining and measuring “savings” is a persistent challenge. Time and again, we heard about the different ways that people can choose to set aside money and different ways people understand their own savings behavior. Is there a certain amount of time that money must be kept aside to be considered “saving”? Or does money even need to be formally set aside at all? Pre-paying bills, giving money to a trusted neighbor to hold, keeping extra funds in a checking account, or buying in bulk can all be forms of saving, and these behaviors would not be captured in any easily trackable bank statement or data feed. Further, a focus solely on savings may be insufficient, as there are many other activities, like debt repayment, that improve financial security.
  2. The complexity of tax preparation makes introducing financial security topics difficult. Taxes can be intimidating and complicated. During the filing process, tax filers may be focused on completing the task at hand and may have scarce cognitive resources to think about saving or other financial topics not immediately relevant to their taxes. Private preparers and paid software often introduce products and offers that are not relevant to financial security. Therefore, the tax preparation process might not be the right moment for these interventions.
  3. Framing and messaging matter. Communication strategies can impact behavior. Since consumers are bombarded with messaging about how to spend their refund at tax time or told that spending is saving (e.g. save money on your next purchase), the framing of a tax time financial security offer or incentive must be effective to compete. While motivators are not universal, some messages have been more effective than others. For example, encouraging people to set savings goals can help them actualize desired behavior. Messaging about emergency saving was most effective in the R2S experiment. Children can be a powerful savings motivator for parents. The timing of communication is also important, as many filers have decided what to do with their refund before arriving at the tax site or beginning the filing process.

Based on this research, we designed conceptual solutions to better understand how the above insights might play out in the real world. You can learn more about these insights and the conceptual solutions in our report, Tax Time and Beyond: Future Directions for Advancing Financial Security.

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