Planning for the Stimulus Rebate: A Catalyst for Saving

When rebate checks from the economic stimulus begin arriving this May, taxpayers will be asking themselves, Is it time to save or spend? While the government hopes that consumers will spend the money, the Shriver Center recommends another course. The best financial decision is to save, invest, or pay off debt. For the most part, Americans claim that they will make the right choice.

According to a recent survey by American Century Investments, almost two of every three Americans do not plan to spend tax rebates included in the proposed government stimulus package. Roughly 36 percent of those receiving a rebate plan to pay off loans or credit card balances, and another 25 percent plan to save or invest it.

By stimulating savings and investment with rebate money, Americans can begin overcoming the consumer overspending habit that has contributed to the current economic crisis. In 2005 the net private savings rate was negative for the first time since the Great Depression, and, given the stormy forecasts of a looming recession, it is good advice to save those rebates for a rainy day. This means breaking from the borrow-and-spend mentality that has thrown many Americans into debt, and using rebates to prepare for future emergencies or needs.

Varied sources offer consumers advice on handling rebates. The Internal Revenue Service (IRS) and the National Community Tax Coalition have answers to frequently asked questions: if taxpayers use direct deposit of tax refunds into one account, the stimulus payment will also be deposited to that account. If the taxpayer uses the split refund option with Form 8888, the IRS will send the stimulus payment via paper check.  David Wyss, chief economist for Standard & Poor’s, acknowledges that, for individuals, it is best to either save or pay off credit cards. The National Foundation for Credit Counseling offers several alternative uses, such as opening a retirement account, starting a tax-free college savings plan, or creating a savings account. Thomas Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, cosponsors a campaign called “Feed the Pig,” which also advises consumers on savings programs.

Meanwhile, refund anticipation loan providers threaten to strip rebate funds from taxpayers. In response, Senators Charles Schumer (D-NY) and Chuck Grassley (R-IA) sent a letter of warning to the loan provider industry to halt “instant rebates” and to abide by state laws capping interest rates. Grassley stated, “The companies that offer these loans need to stand down and not try to exploit an economic downturn for their gain at taxpayer expense.” A copy of the letter can be found here.

For more information on tax preparation assistance, the Economic Stimulus Act of 2008, and the upcoming stimulus rebate, contact Dory Rand at doryrand@povertylaw.org or Brian Clappier at brianclappier@povertylaw.org..