Great news: Within the thousands of pages of tax law lies a provision called the Earned Income Tax Credit (EITC) that enables many working poor families to climb out of poverty. The bad news is that many low-income taxpayers are unaware of the EITC and don’t know how to take advantage of it. Nevertheless, the most recent estimates show that the Earned Income Tax Credit lifts more children out of poverty than any other anti-poverty program—2.4 million children. Without this crucial infusion of cash, it is estimated that the child poverty rate that year would have been nearly one-fourth higher. However, $3 billion dollars in EITC benefits intended for working families were diverted in tax year 2005 to commercial tax preparers and lending institutions that often charge high fees for tax preparation. They also entice many low-income taxpayers to take out Refund Anticipation Loans (RALs), which causes an even greater loss of money among them.
According to Internal Revenue Service (IRS) figures, more than 22 million taxpayers received the EITC for the 2005 tax year, with an average benefit amount of $1,894. The total EITC revenue paid out represented a $41.8 billion gain for those individuals, children and families and the communities in which they live and work. These tax refunds due to low-income taxpayers also spur local economies, with surveys showing that most EITC recipients use their refunds to meet short- to medium-term needs such as catching up on rent and utility bills, purchasing clothes for their children or repairing their car. In San Antonio, each additional dollar received through the EITC generated about $1.58 in local economic activity.
For a number of years, the Children’s Defense Fund (CDF) has helped low- and moderate-income tax filers gain access to tax credits for which they are eligible—including the EITC and the Child Tax Credit—by raising awareness and providing free tax preparation assistance through the IRS Volunteer Income Tax Assistance (VITA) program. The IRS partners with organizations to certify and train volunteers to help prepare tax returns. VITA sites, often sponsored by community organizations, are located at neighborhood centers, libraries, schools, shopping malls and other convenient locations.
The need for free tax preparation to help low-income taxpayers is great for several reasons.
First, for millions of tax filers, complex federal and state tax laws, difficulty understanding forms and the time required to figure them out make the prospect of preparing and filing tax returns daunting. This is especially true for low-income filers who heavily depend on commercial tax preparation sites. For tax year 2005, almost 71 percent of EITC recipients in the United States paid to have their returns completed professionally, which took nearly $2.3 billion in EITC benefits out of the pockets of families and individuals most in need.
A portion of their hard-earned income is also diverted to short-term, expensive Refund Anticipation Loans (RALs) based on the filer’s expected tax refund. RALs often carry triple-digit interest rates and a $100 charge for the filer to get their refund within a few days. Ultimately, RALs cost the typical EITC recipient 8.1 percent of his or her federal refund. CDF issues reports warning low-income taxpayers about RALS and is seeking better legal protections.
As we enter the 2007 tax season, it is essential that low- and modest-income families benefit fully from the EITC and other tax refunds. To make that happen, CDF continues its campaign to increase taxpayer awareness of available free tax help, decrease reliance on RALs and train community groups across the country to conduct VITA programs. CDF runs VITA programs or works with coalitions and other VITA programs in several states including Texas, South Carolina, California, Minnesota, New York, Ohio, Mississippi and the District of Columbia.
Recent data show that RAL usage among EITC recipients decreased for the second consecutive year. CDF was able to help families recoup more than $65 million in tax refunds during the 2004 tax season, more than $105 million during the 2005 tax season, and over $169 million during the 2006 tax season. These dollars mean a lot to struggling families.
For more information about CDF’s tax and benefits outreach program, go to staging.childrensdefense.org.