Brad Bly - Community Affairs Senior Project Manager
Published November 1, 2004 | November 2004 issue
The Earned Income Tax Credit, or EITC, is a federal tax benefit for working people whose incomes fall below an amount specified annually by the Internal Revenue Service (IRS). In 2003, the cutoff was $33,692 for an individual or family with more than one qualifying child, or $34,692 for married couples who file jointly and have more than one qualifying child. Eligible individuals must file federal and state tax returns in order to claim the credit, even if they are not otherwise required to do so because their incomes are low. Those who qualify for and claim the EITC can reduce their federal tax liability. When the credit exceeds the amount of taxes owed, it results in a tax refund.
The EITC was created in 1975 and is the largest federal aid program supporting low-income workers. The Annie E. Casey Foundation found that in 2001, more than 19 million people nationwide claimed the credit, resulting in more than $32 billion in tax reductions or refunds. This was equivalent to a 13 percent boost in the incomes of working families. In 2001, EITC refunds averaged $1,700, but they can be up to $4,200 per year, depending on family size and income. Research suggests that the credit has encouraged welfare recipients to enter and remain in the workforce and continues to lift more working families out of poverty than any other federal program.
Despite this favorable information, studies find that up to 25 percent of eligible households fail to claim the credit. A lack of awareness of the EITC is one of the main reasons. Researchers have found that many families, especially those whose first language is not English, do not know the credit exists. Still other families are aware of the credit but do not know how to file for it.
Many families who do file for the credit end up losing a significant portion of their refunds in the process. The complexities of filing federal and state income taxes drive many eligible EITC filers to seek help in preparing their returns. Studies estimate that two-thirds of those who apply for the EITC pay commercial tax preparers for this service. The cost of tax preparation and electronic filing, averaging $100, reduces the amount of benefit to low-income families.
Of more concern are costly refund anticipation loans, or RALs. These short-term loans use the taxpayer's refund as collateral. Many RALs charge high fees and interest rates to provide an advance on a taxpayer's anticipated refund. Often, the advance is available just eight to ten days sooner than the IRS can provide the refund via direct deposit. The cost of a RAL can substantially reduce a family's potential EITC refund. It is not uncommon for more than half of a refund to be lost to finance charges, tax preparation, system administration, electronic filing and other fees. Also, if the IRS does not issue a refund for any reason, a RAL has the potential to leave a family in financial crisis. If an anticipated refund is not received, the family may be unable to pay the RAL, resulting in collection proceedings and a damaged credit rating. It is estimated that 40 percent of families who claimed the EITC in 2001 took out RALs on their refunds.
Commercial tax preparers are not the only option for those who need help filing their taxes. Free tax return preparation is available to taxpayers with incomes of $35,000 or less and those aged 60 and older through the IRS's Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. Most VITA and TCE sites are sponsored by local nonprofit organizations and located in community centers, schools, libraries or churches. Site volunteers are trained to advise taxpayers of the credits and deductions they may be entitled to, including the EITC, child tax credit and credit for the elderly. These sites operate from January through April each year and often provide other free services, such as basic information on saving, investing and money management.
There were approximately 550 free tax preparation sites in the Ninth District in 2004. Of these, 96 were located in the Twin Cities. Some of these sites were located in neighborhoods with high concentrations of immigrants and ethnic minorities. Recognizing the needs in their communities, volunteers at these sites offered free tax preparation in languages other than English.
One such site was at the U.S. Bank branch at 919 East Lake Street in the Powderhorn Park Neighborhood (Powderhorn) of south-central Minneapolis. Branch Manager Felicia Ravelomanantsoa has a good understanding of the diversity in Powderhorn. Her staff members, many of whom live in the neighborhood, speak a total of 12 languages.
According to Census 2000, nearly 30 percent of the population in the neighborhood reported their race as Hispanic or Latino. Of those reporting Spanish as the language spoken at home, 64 percent claimed that they speak English "not well" or "not at all." So when the Minnesota Department of Revenue—a partner with the IRS in promoting the VITA program—contacted Ravelomanantsoa about starting a VITA site in her branch, she knew it was crucial to offer the service in Spanish. She also knew there was a strong need for the VITA site. The latest census figures put the median family income in the neighborhood at $29,512, which is well below VITA site qualification and less than half of the $65,450 median income for the Minneapolis-St. Paul metropolitan area.
"Every year during tax season, commercial tax preparers set up shop along East Lake Street. They charge high fees and offer refund anticipation loans, then quickly disappear once the tax season is over," says Ravelomanantsoa. "Setting up a VITA site at our bank allowed us to offer freetax preparation to community members." Alternatives to commercial tax preparation and RALs may be especially beneficial in Powderhorn. The IRS estimates that in the 2001 tax year, 41 percent of the EITC claimants in the neighborhood's ZIP Code took out a RAL. This was far above the Minnesota average of 22 percent.
VITA sites also provide a means of attracting unbanked low-income individuals into the financial mainstream. Through the VITA program, taxpayers are encouraged to open a bank account for electronic deposit of any refunds. The Powderhorn VITA site at U.S. Bank was able to open deposit accounts for community members who did not previously have banking relationships. Mexican immigrants could open bank accounts by providing a Matricula Consular—an identification card issued by the Mexican government and recognized by a growing number of U.S. agencies and financial institutions—and an Individual Tax Identification Number (ITIN). A specially trained volunteer at the site helped people apply for ITINs, which were also required for filing returns.
U.S. Bank then offered the new account holders its Basics of Bankingfinancial education curriculum, which teaches the fundamentals of budgeting, saving and account management. This training was offered during evening hours in convenient locations, such as the bank branch or local community centers.
In total, the Powderhorn VITA site provided free tax assistance and related financial information to approximately 100 people, and filed close to 50 state and federal returns. This was matched with the opening of new deposit accounts at the branch and an increase in the number of community members who benefited from the bank's financial education program. Taxpayer demand at the VITA site was so strong, the volunteers often had to refer people to other sites operating in nearby neighborhoods. The strong demand has resulted in U.S. Bank's commitment to making the VITA site an annual component of its service in the community.
It can be estimated that $5,000 in commercial tax preparation fees were saved through the U.S. Bank VITA site. The money can benefit the community through savings and investment, and the spinoff effects of local expenditure. This is especially true in neighborhoods like Powderhorn, where people shop locally and the majority of businesses are small, independent and locally owned.
In the interest of promoting tax assistance, financial education and positive spinoff effects like those seen in Powderhorn, the Minnesota Department of Revenue's Community Outreach Unit (COU) works to promote VITA sites in low-income communities throughout the state. The COU helps organizations launch VITA sites, provides site staffing and trains volunteers. Ravelomanantsoa recognizes the support from the COU.
"They were the catalyst in starting up our VITA site, and their support and volunteer training will help ensure the ongoing existence of the site and its benefits to the community," she says.
Jazmine Garcia, a Department of Revenue representative, sees promise in the partnerships that federal and state revenue services, financial institutions, nonprofit organizations and neighborhood residents have formed around VITA sites.
"There is no problem we cannot solve together, and very few we can solve ourselves," she comments. "VITA sites are a good example of that."
VITA sites not only demonstrate the importance of bankers, volunteers and community members working together. They also show how such an effort can benefit the parties involved. Through VITA sites, low-income workers receive needed tax assistance, lending institutions can strengthen their relationships with community members and volunteers have the opportunity to directly help their communities by providing services and financial education to those who can benefit from them most.
Brad Bly is an independent community development economist who works with Native Americans and other underserved communities.
Internal Revenue Service
Annie E. Casey Foundation
Minnesota Department of Revenue Community Outreach Unit