Individual and Institutional Factors Associated With Savings At Tax Time

Background and Purpose: For many low-income families, the intent to save and accumulate assets is obstructed by expenses of daily living. However, one social policy, the earned income tax credit (EITC) has the potential to smooth consumption barriers and increase the likelihood of saving. The EITC provides substantial sums of money to households of working families each year in the form of a refundable tax credit, administered through the Internal Revenue Service (IRS). For some families, this cash infusion from the EITC provides a way to both meet their financial obligations and save or invest in more long-term financial goals. Recent studies suggest that a notable proportion of EITC recipients plan to save at least a portion of their refund. It is possible that if EITC recipients are able to save then the antipoverty effect of the EITC tax policy may be enhanced. The purpose of this study is to examine the individual and institutional factors associated with EITC recipients’ intent to save.

Methods: Our sample of 5,750 survey respondents includes both rural and urban populations in over 80 communities across 14 states, including American Indian reservations. Logistic regression analysis was used to examine individual and institutional predictors of saving the EITC among recipients. Bivariate models were tested first followed by a main effects model that included both individual and institutional factors.

Results: Among survey respondents, 23% indicated an intention to save at least a portion of their tax return dollars in long-term savings accounts or place them toward short-term saving goals including auto and home repair, auto loans, and school expenses for their children. Logistic regression analysis revealed a number of individual factors significantly associated with increased odds of saving the EITC including higher levels of education (p = .00; OR = .46) and a self-reported saving habit (p = .00; OR = 2.63). Receipt of welfare benefits predicted lower odds of saving the EITC (p = .01; OR = .58). A number of institutional factors were also associated with significantly higher odds of saving their EITC including bank account ownership (p = .00; OR = 3.18), direct deposit (p = .01; OR = 1.46) and completion of at least one financial education class (p = .01; OR = 1.41).

Conclusions and Implications: Results from this study suggest that, despite low incomes, EITC recipients want to save at least a portion of their tax refund. Recently, a number of programs designed to promote savings options for EITC recipients have been developed, including assistance with bank account opening paired with direct deposit and an option on the tax filing form to split the tax refund into multiple accounts, including a savings account. The uptake of this option has been surprisingly low. Therefore, a more careful consideration of existing savings behavior among EITC recipients and desired savings goals is important so that the most appropriate policies and programs can be offered to match the goals of these low-income, working families.