What Federal Tax Credits Benefit Low Income Families? ..

1
Utilizing Tax Credits
As A Catalyst For Family Economic Success
A Gateway to self-sufficiency
November 13, 2003
2
What Federal Tax Credits Benefit Low Income
Families?

• Two major federal tax benefits for low-income
  workers
• Earned Income Tax Credit (EITC)
• Child Tax Credit (CTC)

3
EITC CTC are Refundable Credits

• Credits offset any tax liability
• Excess received as refund

4
Purpose of EITC

• EITC was first enacted by Congress in 1975 to
• Reduce the tax burden on low income workers
• Supplement wages
• Make work more attractive than welfare

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What is EITC?
The Earned Income Tax Credit in Tax Year 2003
5,000
No Children
4,204
One Child
4,000
Two or More Children
3,000
2,547
2,000
1,000
382
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Source Internal Revenue Service
6
EITC Helps Working Families Exceed the Poverty
Line
107
Estimated
Poverty Line
12,406
EITC
8
for Family of
2,506
Two
Food Stamps
Food Stamps
1,272
1,272
(including
one child)
Annual Income
Full-time Minimum
Full-time Minimum
Wage Job (less
Wage Job (less
withholding)
withholding)
9,512
9,512
With EITC
Without EITC
Assumes 2,000 hours of work per year and no work
or child expenses
7
How Does EITC Reduce Tax Burden on Low Income
Workers?
8
How Does EITC Supplement Wages?
9
What is the Child Tax
Credit?

• 1,000 for Each Qualifying Child
• Partially Refundable Starting in 2001
• Working Families Can Receive Both the Child Tax
  Credit and the Earned Income Tax Credit in the
  Same Year

10
What Is the Economic Impact of EITC in the Bay
Area?

• 2001 Tax Return Data For Alameda, Contra Costa,
  and San Francisco Counties.

11
Why Should Communities Be Interested?

• Studies indicate that 15-25 percent of eligible
  workers are not claiming the EITC.
• A recent Treasury Department audit found that
  over 600,000 potentially eligible families did
  not claim the CTC in TY 2001.

12
Estimated Potential Impact of Unclaimed EITC in
Bay Area

• 38,000 Potential Additional EITC Recipients
• 18.3 Million Dollars of Potential EITC Refunds
  Not Received
• Estimates based on filed return data and
  independent Research Studies for Alameda, Contra
  Costa, and San Francisco Counties.

13
Why Is There a Need For Action Around EITC
Education and Outreach?

• Limited Education, Language and Financial
  Abilities
• IRS Efforts in the Past Have Failed to Reach All
  Eligible Families
• Proactive Approach Required to Access EITC and
  Other Tax Credits

14
Why Is There a Need For Free Tax Preparation
Services?

• Inability of Working Families to Prepare Their
  Own Returns
• Preserve the Full Value of the Credit

15
Why Is There a Need To Link Asset
Building/Financial Literacy Services?

• 22 of Families With Income Less Than 25,000
  Have No Bank Account
• Forced to Use Check Cashers, Refund Anticipation
  Loans, etc.
• Lack of Participation in Existing Home Ownership
  and Financial Literacy Programs
• Providing Financial Skills Is Key to Gaining
  Economic Independence

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Linking the Pieces

• Outreach Reach Eligible Families Not Currently
  Claiming the Credit
• Free Tax Preparation Preserve the Value of the
  Credit
• Asset Building Introduce Financial Literacy at
  Tax Preparation Sites