By Corey CarlisleIt’s tax time, and for more than two-thirds of Americans, their tax refund is the single largest payment they’ll receive all year.
Last year, approximately 80 percent of all tax returns resulted in the issuance of a refund, and the Internal Revenue Service estimated the average tax refund was approximately $3,100. For most Americans, particularly those living paycheck to paycheck, that sum represents a substantial financial windfall—bigger than most paychecks and almost four months’ worth of groceries for a typical family.
Keep in mind these refunds are a direct result of overpaying Uncle Sam, in which case a conversation between the employee and their human resources department about making an adjustment to withholdings would allow the employee to have more money throughout the year. For some, however, a tax refund can act as a forced savings mechanism.
For low-income workers, the struggle to get by—let alone save—is often overwhelming. Congress recognized these challenges and created the Earned Income Tax Credit for the working poor. Twenty-six states, plus the District of Columbia, have established their own EITCs to supplement the federal credit. The amount of EITC is calculated on a recipient’s income, marital status and number of children. During the 2015 tax year, the average EITC was $3,186 for a family with children, compared with just $293 for a family without children. Research indicates that families mostly use the EITC to pay for necessities—repairing homes, maintaining vehicles needed for the commute to work—and in some cases, to pay for additional training and education to get ahead in the workplace.
Even though the EITC lifts around five million people—many of whom are children—above the poverty line, nearly 25 percent of eligible workers fail to claim the credit. The primary reason is that those who are eligible must file a tax return, even though their incomes are too low to trigger any federal tax liability. This perceived complexity likely discourages many from claiming the EITC. There is also a significant lack of awareness about the credit.
The promotion of sound financial planning, and in particular the encouragement of saving, has been the hallmark of bankers’ financial education training and outreach efforts. Financial institutions, nonprofit groups and coalitions across the country are working to increase access to tax support services and extend the benefits of EITC to more low-income working families. Examples include:
- Providing bank products and services that enable EITC recipients to directly deposit their refunds
- Sponsoring IRS volunteer income tax assistance programs in bank branches and supporting bank employees who volunteer as tax preparers in low and moderate income communities
- Encouraging the use of EITC refunds in bank-sponsored savings match programs, also known as individual development accounts
Motivated by a survey that showed 62 percent of Vermonters reporting they lacked adequate rainy day savings, the $862 million-asset Northfield Savings Bank in Northfield, Vt., initiated Chittenden County Saves Week with the CASH (Creating Assets, Savings and Hope) Coalition of Chittenden County. CASH members include the United Way, Champlain Housing Trust, Growing Money At Champlain Valley Office of Economic Opportunity and Hunger Free Vermont. The program features more than 15 free workshops, including an introduction to saving and the EITC designed to help Vermonters create a savings plan. Through volunteer outreach and organization, the bank was able to pull this diverse coalition together and share information among their customers and clients to provide a broader awareness of the savings and financial planning programs available in the community.
As these and other initiatives multiply and strengthen, the hope is that all will find a path to saving.