An idea for helping tax filers save more of their tax refund depends on the type of hint or suggestion you make. (Photo: Bigstock)

To make people set aside some of their income tax refunds, you can hint at them to do it—but only some hints are effective.

Those are among the findings of a study appearing in the Journal of Consumer Affairs, which sought to identify ways to encourage low- and moderate-income households to save more of their tax refunds.

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In the experimental study from the Brown School at Washington University in St. Louis, reported Futurity, households using an online tax preparer to file their income tax returns and choosing to receive their refund electronically were randomized into a total of nine groups—eight of which received different combinations of motivational savings prompts and suggested shares of the refund to save, either 25 percent or 75 percent, and a control group, which received neither prompts nor suggested savings amounts.

According to the study, part of the Refund to Savings Initiative, which uses behavioral economics to encourage tax filers to save their tax refund, the groups that got prompts to save and suggestions of how much were more likely to contribute at least some of their refund to a savings account and more likely to split their tax refund.

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Interestingly, when various specific motivations to save were suggested—such as to start an emergency fund, a general savings fund or retirement savings—those receiving those hints either did not increase savings or actually decreased the level at which they saved.

But when prompted to save generally, or when receiving a hint about a specific target amount to save, recipients did follow the prompts (although the amounts they saved differed from the amounts suggested).

The study finds three effects of “treatment” (hints to save or to save a specific amount) administered to the eight groups:

  • First, “the probability of contributing to a savings account (i.e., the probability of putting the whole refund in a savings account or of splitting the refund into more than one account) and the amount contributed to a savings account” increased. Results indicate that “[a]bout 7.2 percent of control-group members contributed at least part of the refund to a savings account. In comparison, 9.8 percent of the treatment groups contributed at least part.”

  • Second, treatment slightly raised the probability of splitting the refund between a checking and a savings account.

  • And third, among those who did split their refunds, allocation suggestions resulted in a substantially larger effect. “The share of the refund dedicated to a savings account was 16 percent among refund splitters in the control group, 34 percent among refund splitters shown the suggestion to save 25 percent of the refund, and 64 percent among refund splitters shown the suggestion to save 75 percent of the refund.”

So, even though it can be tough for low- and middle-income households to save, such nudges could help them do so.