This next year could be an unprecedented opportunity for low- and moderate-income households to build essential short-term savings. Between tax refunds, tax credits and expanded stimulus and government aid due to the pandemic, Commonwealth estimates that millions of low-earning households with children could see $10,000 or more of new income in 2021 and early 2022. Some of the sources of cash include:
- A third round of Economic Impact Payments (EIP) have already begun, with the IRS poised to distribute more this week. For a household of four with two qualifying dependents, that’s an immediate $5,600.
- A provision of the American Rescue Plan excludes up to $10,200 of 2020 unemployment insurance from federal income taxation. For tens of millions of workers who received these benefits last year, that will lower what they owe for last year, potentially adding thousands of dollars to their tax refunds.
- Households facing unemployment could be eligible for an additional $300 per week in extended federal unemployment benefits through early September, or up to $7,500 in total.
Additionally, for next tax season, changes to the Child Tax Credit for 2021 will be worth several thousands of dollars for families with children, now benefiting families with little to no earned income. These families were previously ineligible for the maximum benefit.
For example, low-income married households with two children under age six could see a $7,200 credit; half of the total amount of those anticipated credits will start flowing from the IRS in the second half of this year in the form of periodic payments.
Expansions to the Child and Dependent Care Tax Credit allow some families a fully refundable credit of $8,000, which is significantly more than previous years. Some lower-earning workers without children will benefit from expansions to the Earned Income Tax Credit, worth up to almost $1,000 more for those workers.
A Crucial Moment for Employers
However, even as the cash may be coming, the support systems to access funds without extra fees may not be adequate. Industry experts in BlackRock’s Emergency Savings Initiative say this is a crucial moment for employers and financial providers to play a role in communicating how to access and use savings accounts and the importance of saving money for an emergency.
According to an analysis from Financial Health Network that was published in a recent report from Brookings Institute, Americans spent at least $66 million on check cashing fees alone to access the government aid in 2020. Other reporting has shown an uptick in high-risk stock trading that appears related to stimulus payments, the New York Times reported.
“This may well represent the biggest opportunity in a generation for some households to build emergency savings. Employers and financial service firms have the tools families need to save some of these funds, from savings accounts to HSAs to 401(k)s” says Timothy Flacke, Commonwealth’s Executive Director. “The key is reminding people of those tools, and supporting them to take action.”
Some Ideas for Employer Messaging
Highlight access to savings tools
Workers likely don’t need to be convinced of the importance of building this savings cushion — what they need is an effective tool for doing so. Employers can help employees by connecting them with savings tools to make savings as easy as possible and remind them of pathways to savings within the employer offerings. The IRS may be sending the funds, but workers may still want to increase their after-tax retirement or Health Savings Account contributions.
Communicate the importance of planning ahead
Research from Common Cents Lab has shown that using a tactic like “pre-commitment” can boost savings rates for tax refunds or other windfalls. In plain terms, it means simply making a plan ahead of time about what to do with the money before it actually arrives. This could be executed through messaging for employees to plan ahead.
Message with specificity for savings
The importance of saving may be obvious but a vague obligation can make it harder to motivate to do it. Research shows that attaching significance to saving or a reason why employees might save can improve their chances for success. For example, instead of simply urging people to “save more,” the messaging might frame it as an opportunity to “save for transportation emergencies for your family.” This personal significance motivates people to work harder towards achieving the goal. This might be accomplished through a virtual “bulletin board” or response mechanism where people can post or pin ideas for their savings.
What’s Different About 2020 Income Tax Returns
If you’re an employer messaging about tax time and filing (the deadline for filing personal income federal income tax returns has been extended to May 17, 2021 the IRS has said) , the 2020 return could be a little different if there were furloughs and/or unemployment insurance was used by employees in 2020.
This year, a lookback provision could be helpful to tax filers who utilize tax credits as part of their income tax return. The rule enables people who earned less in 2020 to use either their 2019 or 2020 earned income for the EITC and ACTC this tax season for filing in this tax season. That could help households maintain their expected tax refunds and continue to have a pathway to build emergency savings this year. Commonwealth has assembled guidance for organizations to help communicate the lookback provision.
While stimulus payments are not taxable income, we do know that they likely helped many individuals with short-term saving in 2020. ESI analysis showed nearly six out of 10 people who became new savers — those who were able to save money for an emergency in 2020 who did not the year before — had income of less than $60,000.
“Building emergency savings is a foundational step for financial security for many households. We also know that stimulus aid, tax refunds, and interventions from employers can help people to accomplish that,” says Chandni Ohri, Program Lead for Emergency Savings Initiative. “This is an opportunity for employers and institutions to take action and support people in taking the right next step.”
Not intended to provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
BlackRock’s Emergency Savings Initiative
BlackRock announced a $50 million commitment to help millions of people living on low to moderate incomes gain access to and increase usage of proven savings strategies and tools – ultimately helping them establish an important safety net. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions on an individual and corporate level. Led by its Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give the initiative a comprehensive and multilayered approach to address the savings crisis. Partners including UPS, Mastercard, MX, and Self Financial have joined BlackRock’s Emergency Savings Initiative to help their employees and customers take the essential first step toward long-term financial well-being.