What are Split Refunds?
Why do Split Refunds matter?
Do low-income tax filers care about Split Refunds?
How can I learn more?
Beginning in tax season 2007 (for tax year 2006), all tax filers due a federal refund will have the option to have their refund direct deposited to up to three destinations. Tax filers will use IRS Form 8888 to indicate which accounts and in what amounts they would like their refund disbursed. Any account in the taxpayer’s name with an account number and routing number can receive part of a federal tax refund.
Why do Split Refunds matter?
Since the late 1990s, advocates for working poor families have promoted “asset building,” as a philosophy that long-term improvements in families’ economic security can be achieved by a gradual, often painstaking accumulation of meaningful assets, such as a family home, income-generating small business, post-secondary degree or certificate, or retirement nest egg. Fueled by the federal Earned Income Tax Credit (EITC), which was worth up to $4,400 in 2006, low-income families often receive substantial tax refunds. The ability to direct part of these refunds toward immediate spending needs and part to savings makes tapping tax refunds for asset building much easier.
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Do low-income tax filers care about Split Refunds?
Pilot projects and new public programs over the past 15 years have shown convincingly that many working poor families recognize the importance of assets, can save a meaningful portion of their income, and, despite considerable challenges, are often motivated to save for a brighter future. Among middle and upper income families, research shows that much saving occurs as a result of enabling institutions, systems or programs, such as automatic payroll deduction. Refund splitting provides a similar assisted saving mechanism to lower-income families, allowing a single decision made during the tax preparation process to ensure an aspiration to save will be realized.
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The following resources may be of assistance:
Research on Split Refunds:
- Refunds to Assets: Splitting Refunds and Building Assets. Presentation of R2A pilot research findings to NBER Tax Policy and the Economy Conference, September, 2005.
- Leveraging Tax Refunds to Encourage Savings. Policy brief published by the Retirement Security Project prepared by Peter Tufano, Daniel Schneider, and Sondra Beverly, August 2005.
- Splitting Tax Refunds and Building Savings: An Empirical Test. Working paper prepared by Sondra Beverly, Daniel Schneider, and Peter Tufano on the 2003 R2A pilot, February 2005.
- An Evaluation of Tax-refund Splitting as an Asset-building Tool for Low-to-middle Income Individuals. Policy Analysis Exercise prepared by Anne E. Chiou, Samuel E. Roe and Ethan S. Wozniak. An evaluation of the effectiveness of the R2A programs in Tulsa, OK and New York City, NY offered during the 2005 tax season, April 2005.
- Refunds to Assets: Splitting Refunds and Building Assets. Presentation of R2A pilot research findings by Peter Tufano at 2004 IDA Conference.
- Promoting Savings through Electronic Bifurcation of Income Tax Refunds: Findings & Recommendations. Background paper prepared for D2D by Colleen Dailey. June, 2003.
Information about asset building:
- Key Questions in Asset Building Research, by Michael Sherraden, Director of the Center for Social Development, George Warren Brown School of Social Work, Washington University.
- The Asset Building Program of the New America Foundation aims to broaden the ownership of assets in America, providing low-income Americans with the means to get ahead and a direct stake in the overall success of our economy.
- The Institute on Assets and Social Policy at Brandeis University aims to broaden wealth, reduce inequality, and improve the social and economic well-being of American households by fostering the adoption of an asset policy framework.
- The Corporation for Enterprise Development has been a leader in the asset development movement.
Information about tax refunds for low-income families:
- Many free tax preparation sites are members of the National Community Tax Coalition, which also serves as a clearing house for information and resources about free tax preparation.
- The Center on Budget and Policy Priorities conducts research and analysis to inform public debates over proposed budget and tax policies and to help ensure that the needs of low-income families and individuals are considered in these debates.