Too Many Americans Keep Missing Out on the Earned Income Tax Credit
Communities and policymakers must learn more about accessing major tax benefits such as the often missed Earned Income Tax Credit and the crucial Volunteer Income Tax Assistance program
a Prosperity Now feature
A key federal income tax deadline to claim major benefits looms, along with the start of the Volunteer Income Tax Assistance (otherwise known as “VITA”) training season kicked off in concert with major national organizations such as Prosperity Now.
While not a major headline, this season is a crucial time for communities and policymakers to learn more and advocate more for these massively important benefits, including the often missed Earned Income Tax Credit - or “EITC” for short. As of last count, or based on recent notification letters the Internal Revenue Service (IRS) sent, more than 9 million Americans missed out on the following due to the lack of a 2021 tax return filing …
Three free online tools are currently available to help low-to-moderate income Americans finally file their 2021 tax returns who haven’t done so, yet. Each tool is designed to meet current November deadlines …
The IRS has a Free File tool that will close on Thursday, November 17th is for people who’ve earned $73,000 or less.
There is also ChildTaxCredit.gov for those with incomes less than $12,500 or married couples who’ve filed jointly with incomes under $25,000.
Lastly, Code for America developed GetCTC.org to claim 2021 child tax credits and third stimulus checks. People must file using that tool by today, November 15th.
The “EITC” Gap
The large volume of Americans who haven’t filed their tax returns in 2021 is not just a one-year problem. Lack of tax filing, which prohibits millions from accessing major benefits such, has been an ongoing problem for years. This is particularly pronounced with access to the EITC.
When first enacted in 1975, the federal Earned Income Tax Credit (EITC) was small (a maximum of $400) and positioned as an offset to Social Security payroll taxes for the lowest-income workers. The credit has increased in size and scope since – with notable expansions in 1986, 1990, 1993 and 2009 (as well as a one-year temporary increase in 2021) – and now constitutes one of the nation’s largest anti-
poverty programs. The program has been so effective in reducing poverty that 29 states plus Washington, D.C. and Puerto Rico now have their own versions of the EITC, structured as “piggyback” credits equal to a percentage of the federal amount …
The EITC combines earnings supplementation and a child allowance and is equal to a percentage (which varies by the number of children that can be claimed) of wages or net self-employment income up to a threshold. The credit is phased out by a percentage of earnings above a second threshold (both thresholds also being tied to the number of children on the tax return). It is claimed as a credit against income taxes on the annual tax return, with any excess amount paid as a refund.
In 2021, the largest federal EITC – $6,728 – may be claimed by married taxpayers with three or more qualifying children, who are earning between $14,950 and $25,470 annually. The credit is fully phased out at household incomes above $57,414. The maximum credit for a single taxpayer with one child is $3,618 (for incomes between $10,640 and $19,520), with an upper income limit of $42,158. The credit
claimable by a taxpayer without a qualifying child is much smaller: in 2020, the maximum was $538 with phase-out starting at an income of $8,970; the temporary increase for 2021 increases those figures to $1,502 and $11,610 respectively (with some credit payable up to an income of $21,427).
More than 26 million taxpayers claimed nearly $65 billion in EITC on tax year 2018 returns (the most recent data available), representing over 17 percent of all individual income tax returns filed that year. The average federal EITC claimed equaled $2,451. According to rough estimates of U.S. Census data, around 27.5 percent of total households in 2017 Census statistics were EITC-eligible in 2017
Nonetheless, a significant number of eligible taxpayers do not claim the EITC. The IRS estimates a 78 percent participation rate (as of tax year 2017). The estimated participation rate by state varies between 73 percent (in California, Oregon, Alaska and Colorado) and 83 percent (Vermont). Based on the IRS estimates of participation, approximately seven million eligible households fail to claim the EITC each year. Although it is unlikely that these taxpayers would receive as large a credit as
those who already claim it, an average credit of even the amount of current claimants ($1,225) would still equal unclaimed assistance of $8.6 billion annually. This is likely payable to some of the most vulnerable and socially disconnected families.
Eligible, non-claiming EITC households fall into two groups: 1) those who participate in the income tax system by filing federal returns; and 2) those who are non-filers, who may be …
Persons who are not aware of the EITC or their eligibility and complete their tax returns on their own without return preparation software;
Filers who use return preparation software (either personally or through a preparer) and do not understand or fail to correctly answer questions about family relationships and living arrangements that could establish their eligibility; and
Filers who utilize return preparers who do not properly use preparation software or otherwise do not make appropriate inquiries.
The group of eligible non-filers consists of …
Persons not legally required to file a return who are unfamiliar with the benefits of filing anyway;
Persons who have a filing requirement but do not realize it, who may also be unaware of the EITC or their eligibility; and
Those legally required to file who make a decision, for whatever reason, not to do so.
This is where the expansion and increased funding of programs such as the VITA are absolutely critical.
What Exactly is the VITA?
The Volunteer Income Tax Assistance (VITA) program has actually been around for 50 years, providing free tax preparation services to those who can least afford to pay for it. VITA programs help low-income taxpayers maximize their tax refunds and capitalize on tax time to manage income volatility and achieve financial goals.
In short: it not only makes tax filing easier and more navigable, but it also ensures that it’s free.
Operating VITA sites is often just one component of an organization’s strategy to help families achieve financial stability and prosperity. Many programs also either directly or indirectly provide additional resources and services to help their clients maximize their tax refunds, save for emergencies and plan for the future. Tax time financial capability services offered at VITA sites include activities such as 1) encouraging taxpayers to save a portion of their refund, 2) inviting participation in incentivized refund savings programs, 3) free credit reviews and 4) making direct referrals to financial coaching.
In 2015, with support from the W.K. Kellogg Foundation, Prosperity Now’s Taxpayer Opportunity Network (TON) began exploring the role and impact of VITA programs in helping taxpayers access financial capability services at tax time. Today, we release the full report detailing our findings.
Several themes emerged from that research:
VITA is a financial capability service. Often overlooked as a financial capability service in and of itself, we sometimes forget that VITA is seldom a stand-alone service. It is more often part of a suite of financial capability services being offered through a local partner organization.
Layering is good. The tax time moment is indeed a viable opportunity for layering other beneficial services that build the financial capability and financial well-being of thousands of households.
There can be a trade-off between preparing more returns and creating connections. The need to prepare more returns often overshadows a program’s desires and intentions to connect clients with other services that could contribute to improved financial well-being outcomes.
There’s no grading scale. The current mechanism for measuring savings behavior, based on the number of people who elect to split their tax refund, is inadequate. There’s no standard measure of success for programs integrating financial capability services at tax time.
TON is leading efforts to more effectively document and understand taxpayer savings behaviors and overall financial well-being. However, improving financial well-being doesn’t start and stop with saving a part of the tax refund. In addition to understanding savings behaviors, we need to understand the impact of the multitudinous ways in which VITA clients are increasing their financial capability at tax time. These may include paying down debt, connecting to public benefits, making human and direct capital investments (such as car repairs to get to and from work) and increases in knowledge about their tax return, tax reform and how their household is affected by the tax code.
Fortunately, VITA did score a great victory in 2019 with passage of the VITA Permanence Act. That legislation put VITA into law, which means that the members of your local community can continue to benefit from these incredibly valuable services for years to come and improve the value of and access to key tax credits.
Still: it is important that we determine what this means for local VITA programs, and for the annual federal funding process – otherwise known as the appropriation process. Unfortunately, permanence does not mean automatic funding. The determination of VITA funding continues to go through the appropriations process every year to secure funding for the next grant cycle.
Meanwhile, VITA volunteers continue to witness the impact of helping low-income families overcome the sometimes overwhelming challenge of filing their tax return. We have heard first-hand how the information and resources provided in one filing season had a positive impact on their lives and overall financial well-being.
Organizations like Prosperity Now continue to encourage members of the community to become a VITA volunteer. Communities should also organize to contact members of Congress and ask them to support legislation that will help improve the financial well-being millions of Americans who are in desperate need of these benefits. That helps our neighbors and, as the Center for Budget and Policy Priorities recently noted, that’s always a tremendous boost to the overall economy.