As the end of 2020 nears and the likelihood of another stimulus bill passing remains unclear, many Americans are ending the year having faced an unparalleled financial crisis for several months. More than half of Americans report they will run through their emergency savings by the end of the year, or already have. Without Congressional action, 12 million workers will lose their unemployment insurance on December 26. Many organizations are addressing the acute financial pain felt by low- to moderate-income (LMI) families right now, but we also need to prepare for what’s on the horizon. Commonwealth and our partners have identified another issue that may impact LMI families’ financial security at the beginning of 2021.

Our webinar Tax Season 2021: A Looming Crisis for Low-Income Families of Color explained why next year’s tax season may yield lower tax refunds for many filers, and what can be done to help them prepare. Timothy Flacke, Co-Founder and Executive Director of Commonwealth; Justine Zinkin, CEO of Neighborhood Trust Financial Partners; and Leigh Phillips, CEO & President of SaverLife, joined in a conversation moderated by Commonwealth’s Jason Ewas to discuss this issue and what steps must urgently be taken.

Three Key Takeaways

1. High unemployment may have critical implications for families at tax time in 2021. Because unemployment insurance (UI) is not counted as earned income for tax purposes, households who have received UI for much of 2020 will likely receive a much lower earned income tax credit (EITC) and/or additional child tax credit (CTC), resulting in a reduced tax refund come spring. According to Commonwealth’s analysis, the impact of these reduced credits will be most felt by families with children who made up to $25,000 in 2019 and expected to make the same amount in 2020 before experiencing unemployment for most of the year. Families of color, who are more likely to have lost hours or income as a result of the pandemic and typically are more likely to qualify for the EITC, will likely suffer disproportionately. In addition, UI is taxable, but households may not know to withhold or to give their state permission to withhold these taxes. If they do not withhold, their refund will be even further reduced.
2. Reduced refunds would be yet another financial shock for low-income families following a year already defined by its unpredictability. For many working low-income families, large annual tax refunds are an essential tool for managing their financial lives. Tax refunds are the single largest lump sum of money that many households receive in a year, and many filers use it as a way to catch up on bills, pay down debt, boost their savings, or pay for medical procedures or other expenses they have delayed. Tax refunds allow many filers a moment to catch their breath, and without that relief in the spring, low-income households will not have that financial foothold to regain at least some stability. As Leigh Phillips put it on the webinar, “it’s never a good year to have a reduction in tax refunds and credits, but 2020 especially will not be a good year.”
3. The panelists described three pillars of a plan to address this impending issue: awareness, advocacy, and action. Although, as Timothy Flacke pointed out, it is “not satisfying to share bad news in advance,” building awareness of what may happen (through partnership with organizations that work directly with tax filers) is “better than people getting bad news” about their refund “under the most stressful circumstances.” Because the issue is systemic, advocacy will be key to addressing its root cause, and the panelists agreed a coalition working on tax time 2021 could make it easier for tax filers to share their stories with elected officials and shine a light on this important matter. Finally, tax filers need help taking action and accessing financial tools and resources to weather whatever tax season brings.

With 2020 bringing a seemingly unending stream of financial challenges for low-income families to confront, there is plenty of work to be done to support families with the financial hardship they are experiencing right now. However, nonprofits, employers, philanthropy, and government should also look ahead to prepare for what is coming down the road. As Justine Zinkin put it, low-income “families triage their financial priorities in ways that are often invisible to policymakers, so although this crisis isn’t going to show up as a large and sudden crash, it’s going to be a slow drip of people falling behind.” Fortunately, there are steps—supporting awareness, advocacy, and action—that can be taken in the next few months to prevent this financial hardship, starting today. In fact, when polled, the majority of webinar viewers reported that all three solution pillars were relevant to their organization. We look forward to working with a diverse set of partners on this work to support low-income families into next year.

Thank you to Justine Zinkin and Leigh Phillips for joining Commonwealth for this webinar. Commonwealth is continuing to monitor the coronavirus outbreak’s impact on financial security. To stay informed, check out our COVID-19 page for the latest news, insights, and resources; you can also subscribe to our newsletter to receive weekly updates. If you would like to learn more about how to get involved in our initiative to support tax filers in 2021, please contact us at info@buildcommonwealth.org.