Working poor often pass up hefty tax break

Credit can pay as much as $4,300, but many don't claim it

Author: Paul Nyhan

Published: March 18, 2005

Would you turn down an extra $1,000?

Tens of thousands of Washington taxpayers pass up that kind of cash each year when they fail to claim the Earned Income Tax Credit.

They miss out on the federal government's largest chunk of aid for the working poor -- it handed out more than $37 billion last year alone. Despite the tax break's size, 25 percent of eligible taxpayers typically don't claim it.

The 30-year-old program is designed to help those who have jobs but are still stuck in poverty. The number of people claiming the credit jumped from 7.4 million in 1983 to 19.3 million in 2003, according to The Brookings Institution and the Urban Institute.

But the federal government wants more people to take advantage of the credit. Too many taxpayers either don't know about or can't figure out the complicated but lucrative tax break, one of the most effective tools in pushing working families above the federal poverty level, according to a study by the liberal-leaning Brookings Institution.

Carrie Amos plans to use some of her $3,324 payment to repair her credit, one of her first steps toward buying a house. Amos, 35, earned $19,947 last year, but bills backed up as she cared for her two kids and several foster children.

"I definitely will use it to catch up on my water bill," Amos said after leaving a free tax clinic at the downtown Seattle Public Library. "For those who live paycheck to paycheck, income tax is a big day."

She may not get all $3,324, though. Amos owes back taxes and potentially faces penalties, though she can use the Earned Income Tax Credit money to cover that bill.

Amos received more than many, but the tax payments are often not chump change. They averaged $1,784 in 2003.

Even so, more taxpayers in Washington state tuned out than in many others. Only 65 percent of eligible taxpayers actually claimed their money in 2002, according to an Internal Revenue Service report.

While tax cuts often divide the two political parties, the Earned Income Tax Credit has been popular with both Republicans and Democrats since its creation under Republican President Ford. Congress has repeatedly expanded the program.

"Since the EITC is not available to those without a job, it provides an unambiguous incentive to work," the Employment Policies Institute, a Washington, D.C.-based non-profit, said in a statement on the program.

The concept is simple: Reward the poor who work up to a maximum of $4,300.

The execution, though, is far more complicated, with much of the confusion centered on who qualifies for the credit, experts say.

That's because struggling households don't always fit easily into federal definitions of what makes a family, points out Max Sawicky, an economist at the Economic Policy Institute, who tracks tax issues.

Kids may not live in a house all year, for example, or biological parents may be absent, according to Sawicky.

"Just the rules alone can turn people off," said David Williams, who runs the Earned Income Tax Credit program for the IRS.

Another barrier is a misperception that taxpayers without kids don't qualify -- they do, for smaller checks worth up to $390. Yet another is the English language, since some low-income filers are not native speakers, Williams said.

The confusion likely contributes to mistakes. The program reported errors in 27 percent to 32 percent of its returns in 1999, though Williams says the IRS made plenty of changes in recent years to lower that rate.

Taxpayers should be wary of sketchy preparers who encourage people to boost income or claim kids who don't exist, the IRS warns.

How can you tell whether you qualify? As a starting point, if you made less than $34,458 last year, or if you're filing a joint return as a married couple and made less than $35,458, and you have at least two kids, you may well qualify.

If you are single with no kids and earned less than $11,490, or $12,490 if you're married and filing jointly, you also could qualify.

Check with the IRS for a complete list of guidelines.

The biggest paybacks are reserved for working parents with kids -- and that makes sense to Bonnie Beerman, a trained volunteer who helps poor and elderly taxpayers file returns at the West Seattle Senior Center.

"You just can't get enough money these days when you have children," Beerman said.