Splitting State Income Tax Refunds Can Help Families Build Assets

Allowing Coloradans to split their state income tax refunds and directly deposit a portion into several accounts would encourage savings overall and help low- to moderate-income families build wealth. Read the full report to learn more.

For most low- to moderate-income families, their annual tax refund is the single largest payment they will receive all year. Currently, families can directly deposit their tax refund into just one of three accounts or receive their refund as a check. Changing policy to allow families to split and directly deposit the refund among the three types of accounts — checking, savings, and 529 college savings accounts — would make saving for college easier, encourage overall savings and help families meet immediate needs.

In 2014, 1.6 million Coloradans received a state tax refund averaging $489, and that amount will be larger for hard-working families this year thanks to Colorado’s Earned Income Tax Credit (EITC) becoming permanent. Although tax refunds can help families build wealth, many low- to moderate-income families cannot afford to save the entirety of their refund because they have immediate expenses. Families can choose to save a portion of their refund after they receive it, but behavioral economics suggest that an automatic, pre-commitment to save will result in greater savings.

Related: Splitting State Income Tax Refund Fact Sheet

Taxpayers can already split federal tax refunds after a 2003-2005 pilot test showed allowing families to automatically split their federal income tax refunds into multiple accounts encouraged saving among low-and moderate-income families who otherwise would not have saved their refund. In 2010, almost 400,000 taxpayers split their federal tax refund, for a total of $1.7 billion saved.

With the state EITC giving a sizeable boost to low- to moderate-income families’ tax refunds, now is the time to allow Colorado taxpayers to split their state income tax refund. Combined with outreach to Colorado taxpayers, the option of splitting a state income tax refund can open the door to greater savings, an important step in helping families get ahead and stay ahead economically.