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Volume 13, Issue 1, 2013   Federal Reserve Bank of Dallas

The Importance of Filing for the Earned Income Tax Credit

The Earned Income Tax Credit (EITC) encourages work and reduces poverty by rewarding low- and moderate-income working families at tax time. Low-wage workers may receive the EITC even though they owe no tax or are not required to file. When the EITC amount exceeds their tax liability, the Internal Revenue Service (IRS) will still refund the balance.

The EITC is specifically designed to alleviate the federal tax burden for working parents with children, although households without children can also receive small amounts of credit. Credit amounts are calculated based on adjusted gross income (AGI), taking into consideration the number of children and filing status (Table 1).[1] The 2009 American Recovery and Reinvestment Act temporarily increased the EITC for taxpayers with three or more qualifying children and allowed married couples with modestly higher incomes to receive more credit.

Table 1
EITC Income Limits and Maximum Refunds, Tax Year 2012
Number of children
AGI limit for individuals ($)
AGI limit for married filing jointly ($)
Maximum possible credit ($)
0
13,980
19,190
475
1
36,920
42,130
3,169
2
41,952
47,162
5,236
3 or more
45,060
50,270
5,891
SOURCE: Internal Revenue Service.

With nearly 26.5 million recipients nationwide in 2012, the EITC has among the highest participation rates of any income support program. Texas had the fourth-highest average EITC refund of all the states; its nearly 2.6 million filers received an average refund of $2,575.[2] Figure 1 shows the number of EITC refunds in Texas by ZIP code.[3]

Figure 1
EITC Refunds in Texas, Tax Year 2010

Number of EITC Refunds

  • Under 500
  • 500 - 999
  • 1,000 - 1,499
  • 1,500 - 1,999
  • 2,000 and up

The EITC can be a powerful asset-building tool for low-income working families. Still, millions of eligible households do not obtain the refund. Barriers to fully benefiting from the credit include lack of knowledge about the credit or eligibility and the difficulties of filing taxes—in particular, correctly completing the EITC form and worksheet. Private tax-preparation companies offer assistance, but usually at a price—with average fees nearing $200 per return, this option is often out of reach for many low-income families.[4]

To find out about eligibility for the EITC, see "EITC Home Page—It’s easier than ever to find out if you qualify for EITC"off-site on the IRS website.

For those who are able to navigate the often overwhelming process of tax filing, receiving the EITC refund can present challenges as well. Not surprisingly, low-income households are more likely to be unbanked. About 14 percent of households making under $50,000 did not have a bank account in 2011, and for households with incomes under $15,000, nearly 30 percent were unbanked.[5] Unbanked filers may instead use a stored-value card such as a payroll card to receive the refund and avoid paying fees to cash refund checks through an alternative financial-service provider.

Because many EITC recipients use their refunds to pay down debts, cover bills or purchase big-ticket necessities such as automobiles, they may need their refunds as soon as possible.[6] They may be tempted to take out a high-cost, short-term loan, such as a refund anticipation loan (RAL). These types of loan products can take a meaningful chunk out of a family’s refund.

Given the difficulties associated with navigating returns and refunds during tax season, many low-income families miss out on their full EITC benefits. But there are programs specifically designed to address this problem. The Volunteer Income Tax Assistance (VITA) program and its Tax Counseling for the Elderly (TCE) counterpart provide free tax-preparation assistance to low- and moderate-income filers across the nation. At these VITA and TCE sites, IRS-certified volunteers provide tax preparation, counseling and electronic filing at no cost for households making $51,000 or less and/or who are eligible for EITC. Figure 2 shows the number of Texas VITA locations by county.

Figure 2
Number and Locations of Texas VITA Sites by County in 2013

VITA 2013 Map legend

Find the free tax-return preparation siteoff-site near you, or call 211 for local resources.

—Wenhua Di and Emily Ryder


Notes

  1. “EITC Income Limits, Maximum Credit Amounts and Tax Law Updates,”off-site Internal Revenue Service.
  2. “EITC Statistics,”off-site EITC Central, Internal Revenue Service.
  3. The Brookings Institution provides an interactive web tooloff-site of tax-return information at the level of state, metropolitan area, county, city, ZIP code, and state legislative and congressional district for tax years 1997 to 2010.
  4. “At H&R Block, 1040EZ Is Free,”off-site BloombergBusinessweek and H&R Block 2012 Annual Report.
  5. 2011 FDIC National Survey of Unbanked and Underbanked Householdsoff-site, Appendix A, Federal Deposit Insurance Corp.
  6. “How Do EITC Recipients Spend Their Refunds?”off-site by Andrew Goodman-Bacon and Leslie McGranahan, Federal Reserve Bank of Chicago Economic Perspectives, May 2008.

e-Perspectives, Volume 13, Issue 1, 2013

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