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Make Tax Time Pay!Promote the Earned Income Credit and the Child Tax Credit

Presentation by: John WancheckOrganization: Center on Budget and Policy

Priorities www.cbpp.orgPhone: 202-408-1080 Email: wancheck@cbpp.org

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Many workers can make tax time pay by claiming tax credits they’ve earned!!

The Earned Income Credit can mean extra money for many families, for example:

Families raising two children with income between $10,750 to $15,000 can get $4,300.

(Not all workers get this amount, but families can expect, on average, over $2,100.)

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Wait — there’s more!

Some families can get Extra Credit through the Child Tax Credit!

A family could also qualify for a Child Tax Credit worth up to $1,000 per child.

Workers who earn over $10,750 in 2004 can get a refund even if they don’t owe income tax, (amount is based on a % of

their income above $10,750).

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The EIC is our most effective anti-poverty tool for families!

In 2002, the EIC lifted 4.9 million individuals — including 2.7 million children — out of poverty.

The EIC can turn a $6 per hour job into an $8 per hour job.

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The EIC:

Reduces the tax burden on low-wage workers offsets income and payroll taxes

Supplements wages

Provides a work incentive

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The credits help workers keep working and care for themselves and their children.Workers use their credits to: Pay for transportation to the job Keep a car in working order Cover child care costs Help cover medical expenses Buy food and other basic needs Keep current on rent and utility payments

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How do the credits work?

The EIC is sent as a refund from the IRS, even if the worker earns too little to owe income taxes.

The CTC is designed to reduce income tax, but it can also provide an IRS refund for many low-income families who don’t owe income taxes.

Some families are eligible for both credits.

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Here’s how it can really add up!

Mary earned $18,000 in 2004 and has three dependent children under age 17. She owes no income tax. She gets an EIC worth $3,472. She is also eligible to receive a CTC refund of $1,088. Together they add up to a total tax refund of $4,560!

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Who is eligible?

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Workers eligible for the EIC include:

Full-time or part-time workers, including self-employed workers

Workers who also receive public benefits Single or married workers Workers raising a “qualified child” living in their home

(Very low-income workers do not have to have a “qualifying child.”)

Individuals receiving employer-paid disability benefits

Immigrants who are legally authorized to work

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How much can eligible workers earn? A worker raising one child, who earns less than $30,338 in 2004 can get up to $2,604.

A worker raising two or more children who earns less than $34,458 in 2004 can get up to $4,300.

A worker not raising children, who is between the ages of 25 and 64, and earns less than $11,490 in 2004 can get up to $390.

(Income limits for married workers are $1,000 higher than these amounts.)

Investment income cannot exceed $2,650.

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Who qualifies for the Child Tax Credit? Workers who earn more than $10,750 in

2004 and claim a child under age 17 as a dependent

Non-custodial parents.

Immigrant workers with ITINs.

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Earned income: What counts? Wages, salaries, and tips Net earnings from self-employment Employer-paid disability benefits Union strike benefits Military combat pay

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Definition of a “qualifying child”For the EIC: Child can be a son, daughter, grandchild, stepchild,

adopted child, brother, sister, stepbrother, stepsister (or their descendents) or foster children placed by a government or private agency

Child must have lived with the worker for more than half the year

Child must be under 19 or under 24 if a full-time student or any age if totally and permanently disabled

(If you are the qualifying child of another person, you cannot claim the EIC yourself.)

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Definition of a “qualifying child”For the CTC:

Child can be a son, daughter, grandchild, stepchild, adopted child, brother, sister, stepbrother, stepsister (or their descendents) or foster children placed by a government or private agency — same as EIC

Child must be under age 17 — even children with disabilities

Child must be claimed as a dependent on the worker’s tax return

Child does not have to live with the worker

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Rules for immigrant workers Immigrant workers can get the EIC:

must meet the income requirements child must live with the worker in the U.S. for more than half

the year worker, spouse and child must each have an SSN that

authorizes work

Immigrant workers can get the CTC: must meet the income requirements child must live in the U.S. and be claimed as the worker’s

dependent worker, spouse and child must have either an SSN or an

Individual Taxpayer ID Number (ITIN)

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Want to get the most out of every paycheck?

Workers raising children can get the Advance EIC by filing a W-5 with their employer.

Part of the EIC is added to each paycheck – for workers paid on a bi-weekly basis, as much as $118 per month extra take-home pay!

Workers can get year-end refund too!

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Workers should not choose the Advance EIC if they:

Hold more than one jobHave a working spouse, unless both

spouses take the Advance EICExpect a big increase in income during the

year (new job, marriage to someone who also works)

Could end up not eligible for the EIC and have to pay money back to the IRS

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Workers cannot get the Advance EIC if they:

Do not have qualifying children

Get paid day by day

Do not have Social Security and Medicare taxes withheld from their pay

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EIC Benefits for Tax Year 2004at Various Income LevelsThis is not a tax table. Do not use this table to complete income tax returns.

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2004 earned income

EIC for single workers not raising a child

EIC for single workers raising one child

EIC for single workers raising two or more children

$ 5,000 $384 $1,709 $2,010

$ 8,000 $265 $2,604 $3,210

$10,000 $112 $2,604 $4,010

$12,000 $0 $2,604 $4,300

$14,000 $0 $2,604 $4,300

$16,000 $0 $2,287 $3,882

$20,000 $0 $1,648 $3,040

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Note: Married couples with income in the phaseout range qualify for a higher credit than single parents — shown by dashed lines.

The Federal Earned Income Tax Credit in Tax Year 2004

Maximum benefit

$4,300

Maximum benefit

$2,604

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000

Cre

dit

Am

ount

Two or more childrenOne child, single parent

Maximum benefit

$2,604

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How do you claim the credits? There’s no “catch”— but you must file a tax return!

Families must file either Form 1040 or 1040A — not the 1040EZ — and they must attach Schedule EIC for the EIC and Form 8812 for the CTC.

Workers not raising children can file any form for the EIC — 1040EZ is OK.

Families raising children can get some of their EIC in advance in their regular paycheck — up to about $59 in each bi-weekly check — by filing a W-5 with their employer.

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The high cost of commercial tax preparation

When it’s time to file a tax return, many workers seek help from a commercial tax preparer.

70 percent of EIC claimants use commercial tax preparers.

Average fees range from $85 - $120 for

e-filing.

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Why would I not want a “quick refund?”

Refund anticipation loans are risky

Very high-interest loans (can be over 180 percent interest rate)

Can be an additional $80 fee or more

Some preparers charge a percentage of the EIC refund, driving fees even higher

No guarantee refund will equal the loan amount

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Promote free tax preparation assistance

Provide alternative to preparation and loan fees Volunteer Income Tax Assistance (VITA) provides free tax

filing help for low-income workers at community sites.

Expand and improve VITA Recruit community volunteers to be trained by IRS. Community groups needed to host additional sites; more

accessible sites. More sites needed that can provide e-filing (IRS will provide

software!).

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Why is outreach needed?

The eligible population is ever-changing, especially in a changing economy: Workers not eligible in the past who lose their

jobs mid-year could become eligible. Workers just entering labor force may not know

about the credits. Some groups are at greater risk of

missing out on the tax credits.

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Who is at risk of missing out on the EIC and CTC?

Workers not required to file returns $15,900 for a couple; $10,250 for head of

household; $7,950 for a single filer (2004) New employees. Employees making the

transition from welfare to work New parents – including foster and adoptive

parents Divorced or separated custodial parents

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Outreach Partnerships

Build partnerships to connect with eligible families and individuals: Nonprofit health and human services providers Community organizations and institutions Faith-based groups Civic/service organizations Labor unions State and local government agencies (esp. public

benefits) Employers and local businesses Media IRS

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Make special efforts to: Demonstrate how the credits can help workers meet

other goals (paying back bills, transportation to work, future homeownership)

Address language and literacy concerns Integrate outreach activities with partners’ routine

activities Increase the availability of free tax filing assistance

and improve service Consider a comprehensive approach to helping

families obtain benefits they need

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Make Tax Time Pay!2005 EIC & CTC

Community Outreach Kit

Updated for 2005 by the Center on Budget and Policy Priorities.Posters, flyers, fact sheets on EIC & CTC rules and strategies for community tax credit outreach efforts.

To order your free copy: Email eickit@cbpp.org or call us at 202-408-1080

See the 2004 Kit at www.cbpp.org/eic2004