The Inclusive Economy
How Working Families Get Ahead at Tax Time
By Ezra Levin on 06/03/2015 @ 12:00 PM
For the past couple weeks, we have been looking at It’s Not Like I’m Poor, a new book examining the complex financial lives of low-income working Americans, based on interviews with dozens of families. First, we explored the household balance sheets of the working families featured in the book—and we found that these budgets are stretched thin, in part because of the burden of expensive debt that many of the families rely on to make ends meet. That’s where tax-time programs like the Earned Income Tax Credit (EITC) come in. So what is it about the EITC that makes it such a powerful tool for building financial security?
The lump-sum structure makes the EITC an economic mobility program.
While the income these families earn over the course of the year helps them get by, their lump-sum tax refund helps them get ahead. The families interviewed in the book spend months planning how to use their tax refund to “build their aspirations for upward mobility.” These aspirations are reflected in the way families use their tax refunds. A large majority of these dollars go to improving long-term financial security, whether through paying off debt, saving for emergencies or investing in assets.
A minority of these dollars goes to cover immediate basic needs and an even smaller portion goes to nonessential treats. But while these expenses are labeled “nonessential,” this modest spending is deeply meaningful to parents and their children. The occasional treat, a toy for a child or a special night out allows these families to “feel like ‘real Americans’ and makes their children feel like ‘ordinary kids.’”
The tax-time refund is a valued savings tool.
The authors write that “it would be difficult to overstate the importance of the tax refund in generating savings and asset-building goals and helping families make progress toward achieving them.” During the year, families aspire to save, but the pressures of daily budgets often leave them coming up short. These families see the EITC as empowering them to save over the course of the year, even if they are unable to directly save a portion of their regular paycheck.
For one working mother, this “forced savings” aspect of the EITC is “the only way to protect her resources from the demands imposed by frequent financial shocks.” In fact, many families opt to withhold extra tax from each paycheck in order to boost their future refund. Families are extremely averse to owing the IRS at tax time and so are reluctant to take any steps that could reduce their eventual refund.
Most EITC recipients use paid tax preparers to claim tax refunds.
About two-thirds of all EITC claimants use a paid preparer to file their taxes. H&R Block, for instance, charges an average of $192 to file a basic tax return. At the time of the study, many families opted for a “Refund Anticipation Loan,” a predatory product with triple-digit interest rates that has since been ended by the IRS. In its place, paid preparers now offer “Refund Anticipation Checks.” These products charge high prices to deliver refund checks more quickly, but there is great demand for these checks among low-income working families, many of whom view them as a small price to pay for their much-needed refund.
EITC makes ends meet, but financial security is harder to achieve.
Families in the book typically allocated their tax refund within three months. In the nine months that follow, they were able to devote very little of their income and other resources towards savings or debt relief, and they rarely had substantial savings in checking, savings or retirement accounts. While many families manage to save for a rainy day, these funds are soon tapped by “a loss of earnings, a jump in expenses or the month-to-month reality of bills that exceed the cash on hand.” This leaves little financial cushion for later in the year.
It’s Not Like I’m Poor vividly illustrates the importance of tax time to working families. The EITC and other tax programs are powerful tools to help families achieve financial security. That’s why, in the coming weeks, CFED will be releasing new policy research on the EITC and tax-time savings, making proposals to strengthen these programs and engaging the field with advocacy opportunities. To learn more about this work and find out how you can get involved, join the Taxpayer Opportunity Network (TON), a nationwide network composed of more than 500 organizations and individuals focused on helping low- and moderate-income Americans at tax time.