Refundable Tax Credits

Income and work supports may be provided through the tax system as well as through benefit programs. The most important tax credits for low-income households are the refundable Earned Income Tax Credit and the Child Tax Credit (credits that together lifted an estimated 8.7 million people out of poverty in 2011), and the partially refundable American Opportunity Tax Credit, which reduces the cost of postsecondary education.  These credits were improved by the 2009 American Recovery and Reinvestment Act, and these improvements were extended through 2018 by the American Taxpayer Relief Act of 2012. 

Jan 4, 2017  |  PERMALINK »

Delaying Tax Refunds Hurts Hardworking Families

By Jessica Gehr

Each year, more than 27 million low- and moderate-income households file taxes and receive a refund from the Earned Income Tax Credit (EITC), which they use to pay bills, cover expenses such as child care, or make major purchases such as a car. The EITC, with bipartisan support, is one of America’s most important anti-poverty programs. Studies have proven that the EITC and other working-family tax credits encourage work, improve child achievement and long-term educational attainment and earnings, and lead to positive health outcomes.

For the first time in 2017, many early filers—more than half of those claiming the EITC and Child Tax Credit (CTC)—will wait longer for their refunds. The Protecting Americans from Tax Hikes (PATH) Act of 2015, which made provisions of the EITC permanent, also required the Internal Revenue Service (IRS) to delay tax refunds for those claiming the EITC or the refundable portion of the CTC until at least February 15 in an effort to verify wages and reduce errors. A new report by the Urban Institute found that delaying tax refunds will likely lead to increased financial hardship for these hardworking families.

This delay could have serious effects on families who depend on the EITC and CTC. The study found that many families (over 70 percent of early filers with children) rely on the timeliness of their refund to pay down debt immediately. This delay can perpetuate the cycle of hardship, which traps many families and pushes them even deeper into poverty. For example, a late refund may cause a family to miss a car payment, resulting in losing their car and, in turn, their job due to lack of reliable transportation.

Many early filers use their refund to make a housing payment. Missing a housing payment may lead to eviction, which as, explained in Matthew Desmond’s book, Evicted, bears large social costs. Desmond found that evictions dropped in February because many low-income working families dedicated some or all of their EITC to pay back rent.

To meet the PATH Act’s goal of increasing program integrity, we shouldn’t sacrifice the health and financial well-being of families. If Congress is serious about reducing EITC overpayments, lawmakers can authorize the IRS to reduce errors by commercial preparers, adequately fund the IRS to improve administration, and enact proposals to simplify the EITC. While efforts to combat waste, fraud, and abuse can help maintain program integrity, we must assess how these efforts affect the daily lives of hardworking families who are struggling to make ends meet.

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