New Bill Would Help Families Use Tax Refund to Build Emergency Savings

Households with emergency savings can better manage financial shocks, avoid predatory products, minimize financial stress and improve financial well-being. But with low wages, volatile incomes, savings penalties (asset limits) and a lack of access to financial products and services, working families can find it tough to save for emergencies.

A solution? Refunds at tax time. Tax refunds can provide a great way for low- and moderate-income households to build savings for the short term. However, since their tax refund only comes once a year, many working families find it hard to save some of that for a rainy day.

This is where the Refund to Rainy Day Savings Act comes in. Introduced today in the Senate and, for the very first time, in the House by Senators Cory Booker (D-NJ), Tom Cotton (R-AR), Doug Jones (D-AL) and Todd Young (R-IN), as well as Representatives Bonnie Watson Coleman (D-NJ-12) and French Hill (R-AR-2), this legislation has the potential to help working families use their tax refund to save not just at tax time but throughout the year.

The bipartisan bill helps tax filers set aside a portion of their refund as emergency savings for later in the year. Drawing from our Rainy Day EITC proposal, this legislation allows working families to defer 20 percent of their refund by opting into the program. The savings would be transferred into their account six months later with interest.

Lastly, this bill includes language to expand the flexibility of the innovative Assets for Independence (AFI) grant program, which encourages earnings, savings and self-sufficiency by offering matching funds and other incentives to help low-income workers save their own money and build assets. Specifically, the bill widens the allowable eligible asset purchases for AFI, increases the maximum participant match and simplifies eligibility requirements for participation. 

The Refund to Rainy Day Savings Act builds on the success of the Earned Income Tax Credit (EITC), one of the federal government’s most successful and powerful anti-poverty programs. At an average of about $2,400 per household, this tax credit for working families helps keep about 5.8 million people out of poverty. Altogether, refunds received at tax time can make up as much as 30 percent of a low-income family’s annual income.

Working families use their tax refunds in a variety of ways: to save, pay down debt and invest in long-term assets. But refunds come only once a year—at tax time—and by the summer or fall, many families find themselves struggling to get by again. By staggering the tax refund so that working families receive this financial boost not only once but twice a year, the Refund to Rainy Day Savings Act would help ensure that households are better able to weather financial emergencies and enjoy greater financial stability.

To learn more about the Refund to Rainy Day Savings Act, read Prosperity’s Now’s press release on the bill here. Use our Savings Toolkit to spread key messages.

Using tax time to build rainy day savings is moving at the local level as well. As Prosperity Now highlighted in the Washington Post last August, the Rainy Day Refund Act—reintroduced in Washington, DC early this year by Councilmember Brianne Nadeau—also follows a tax time approach to rainy day savings by allowing eligible taxpayers to defer 30 percent of their DC EITC for six months and get a 50 percent savings match. By strengthening this tax credit, working families will have another option to save for their short- and long-term needs.

Join Prosperity Now to help move this innovative legislation forward! Support working families and help them save their tax refunds for the future. Urge your senators and representatives to co-sponsor the Refund to Rainy Day Savings Act.

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