Make Tax Time Pay! New Developments 2009 Presentation by: John Wancheck Organization: Center on Budget and Policy Priorities Website: www.cbpp.org/eic2008 Phone: (202) 408-1080 Email: wancheck@cbpp.org 1
Tax Analysis at www.cbpp.org Big Misconceptions About Small Business and Taxes Few of the 2001 and 2003 Tax Cut Provisions Benefit Families With Modest Incomes Families Helped by the Child Tax Credit Expansion Work Hard in Low-Paying Jobs 2
The Earned Income Credit and Child Tax Credit Tax Benefits Play a Key Role 3
EIC and CTC Background The EIC is a refundable tax credit available to families who work but earn low or moderate incomes. Enacted in 1975 to offset families Social Security payroll tax withholding. It now also supplements the earnings of workers with lower wages. The CTC was changed in 2003 to include a refundable credit for workers earning over $10,000 4
EIC Outreach Campaigns As many as 20-25% of eligible workers nationally don't claim the EIC In 2006, if 20% of eligible workers in TX didn t claim the EIC, over $930 million from the EIC was left in Washington Efforts are needed to ensure eligible workers know how to claim the EIC and other tax credits. 5
Some New Items in 2009 CTC Expansion Qualifying Child Rule Changes Food Stamp Resource Limits Mortgage Debt forgiveness Recovery Rebate Credit 6
Expanding Child Tax Credit Financial rescue bill included: Lower the earnings threshold for the CTC refund from $12,050 to $8,500 Expands the CTC to 13 million more children over $500 increase for some families. $225- $375 for families earning $10,000 - $11,000. 7
Qualifying Child Rule Changes TY 2009 Tax filer must be older than qualifying child, unless child is permanently and totally disabled Parents can waive their child tax benefits, but only to someone with higher AGI 8
Retirement and Education Savings Accounts Won t Affect Food Stamps Until now, savings for retirement or education counted against resource limits (generally $2,000) for food stamps Farm Bill of 2008 excludes qualified retirement savings accounts and education savings accounts (529b and Coverdell accounts) 9
Mortgage debt forgiveness and EITC 2007 law excluded cancelled mortgage debts on principal residences from counting as income Homeowners in the EITC income range would likely become ineligible for the EITC if cancelled debt counted as income Homeowners will need assistance filing Form 982 to claim the exclusion 10
Stimulus Payment on 2008 Returns Recovery Rebate Credit enacted in Feb. 2008. Advance payments made in 2008, no claim required. 2008 returns will have line for this credit. Enables those who missed the advance payment to claim and for those who now qualify for a higher payment to claim the balance. Lengthy IRS worksheet SSA/VA filers will need help 11
Impact of The Earned Income Credit Represents up to a 40% pay increase for some workers Can turn an $8 per hour job into a $10 per hour job In 2005, raised 4.1 million individuals including 2.2 million children above the poverty line 12
Impact of the EIC Texas 23% of all TX tax filers claimed EIC for 2006, bringing in over $4.9 billion, benefiting 2.3 million working families and individuals. H 䁡 lf received CTC refunds an additional $1 billion. United States 16.6% of U.S. tax filers claimed the EIC for 2006, worth $44.6 billion, benefiting 23 million working families and individuals 13
(millions) Reduces poverty Federal investment Maximizing benefit Federal expenditures on the refundable EITC and CTC are comparable in size to those for traditional antipoverty programs Federal outlays, FY2005 Source: U.S. Office of Management and Budget $60,000 $50,000 $40,000 $30,000 CTC Food Stamps $20,000 EITC $10,000 TANF $0
Credit Amount The Federal EIC in Tax Year 2008 6000 5000 Maximum Benefit $4,824 4000 3000 Maximum Benefit $2,917 2000 1000 Maximum Benefit $438 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 Income ($) No Children 1 Child 2 Children Married Filing Jointly Note: Married couples with income in the phaseout range qualify for a higher credit than single 15 parents shown by dashed lines.
Annual Income The EIC: Making a Difference Helping Working Families Out of Poverty, 2008 Estimated Poverty Line for Family of Two (including one child) $14,698 91% Food Stamps $1,884 111% EITC $2,917 Food Stamps $1,884 Full-time Minimum Wage Job* (less withholding) $11,451 Full-time Minimum Wage Job* (less withholding) $11,451 Without EITC With EITC 16
Expansion of EIC and CTC 17
More Work for the EITC The EITC for workers w/o children is not as strong an incentive to join the paid workforce as it provides parents. The poverty rate for children in families with 3+ kids is 26%, more than twice the poverty rate for families with 1 or 2 kids. EITC marriage penalties are more severe than the marriage penalties facing middle-class taxpayers 18
EITC Expansion Bills Strengthen the Earned Income Tax Credit Act of 2007 S. 1333, HR 2222 Expand the EITC for workers not raising children Expand the EITC for workers raising 3+ children Increase marriage penalty relief 19
$12,000 Under Current Law, Childless Workers Are Taxed Into Poverty Single Worker Without Children With Income at the Poverty Line, 2008 $10,000 $8,000 Poverty Line $6,000 $4,000 $2,000 $0 Earnings Before Taxes Earnings After Federal Income & 20 Employee Payroll Taxes
Under Current Law, A Full-Time Minimum Wage Worker Will Be Ineligible for the EITC Once $7.25 Minimum Wage Takes Effect EITC for a Single Worker Without Children Working Full-Time at the Minimum Wage in 2010 (First Full Year With $7.25 an Hour Minimum Wage in Effect) $400 $406 $200 $0 $0 Current Law Proposal 21
EITC Value Childless Workers EITC Expansion Effects Shown Are for Single Workers in 2008 $1,000 $800 $600 Proposal $400 $200 Current Law $0 $0 $6,000 $12,000 $18,000 Income 22
Other EITC Proposals for Workers Without Children Lower the age limit for childless worker EITC Expand EITC for non-custodial parents Incentive to enter work force Incentive to pay child support Provisions in New York state and District of Columbia EITCs 23
Expand EITC for larger families Increase credit to 45% of earned income (up to max amount)= $600 larger maximum EITC EITC would phase out at higher income limit for both single and married workers with 3+ children 24
Further reduce marriage penalties in EITC Current bills Expand income eligibility; increases credit amount for married workers in phase-out range Other proposals: Ignore half the income of lower-earning spouse for EITC determination Allow lower-earning spouse to claim childless worker EITC Allow married w/o children to claim separate EITCs 25
CBPP Papers On EITC Expansion EITC Expansion for Childless Workers www.cbpp.org/10-25-07tax.htm Designing Climate-Change Legislation That Shields Low-Income Households From Increased Poverty And Hardship www.cbpp.org/10-25-07climate.htm Tax Reform and Poverty www.cbpp.org/4-10-06tax.htm 26
The Low-Income Tax Prep Industry Over 70% of EITC returns in TX filed through commercial preparers Over one-third pay for a RAL Many are unbanked, also use check cashers Unenrolled preparers may overcharge and file erroneous returns 27
Unlicensed Preparer Reforms Proposals by National Taxpayer Advocate included in proposed legislation Registration of unenrolled preparers (not enrolled agents or CPAs) Competency tests for unenrolled preparers 28
Working with VITA/TCE Volunteer return preparation Train volunteers; Quality review of returns Referral of low-income clients Take referrals of complex returns not in scope of VITA 29