Coping with a crisis: Financial resources available to low- and moderate-income households in emergencies

Using data from tax records and a longitudinal survey, this brief investigates the choices low- and moderate-income households make about their tax withholding and their preferences for withholding. The relationship between withholding preferences and the use of the tax refund, measures of material hardship, and the use of alternative financial services is also explored. We find that almost half of all survey respondents preferred to overwithhold their income each year in order to get a larger tax refund. Yet despite preferring to take home less income during the year, these households experienced higher levels of material hardship than those who preferred to break even in their withholding, and were more likely to use alternative financial services like payday lenders. Further, households that preferred to overwithhold were less likely to save their refund. We also find that respondents who preferred to break even on their withholding or underwithhold on their taxes still overwithheld a substantial amount of income, indicating that LMI households have difficulty withholding their preferred amounts. Implications of these findings for policy are discussed.

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Project: Household Financial Survey (HFS)