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All children deserve a fair start. Every child deserves supportive parents. Every child deserves to grow up in a family and community that is economically secure, and every child deserves to grow up in a community where an ethic of fairness is reinforced.
Positive Outcomes for Children
Increases in income by as little as $372 per month for a family of four living
in poverty have been shown to have a positive impact on the children's cognitive, social, and behavioral developmental outcomes.
This is one of the many reasons CDF Minnesota advocates to put more money into the hands of low-income families through fair family tax policy, and strongly supports income tax credits. Tax credits have an enormous impact on the financial well-being of low- to moderate-income families, thus improving their overall well-being as well.
Income tax credits help offset the disproportionate share of earnings that low-income families pay in other taxes, such as sales and payroll taxes.
Tax Credits for Families:
- lift millions—many are children—out of poverty
- allow millions to successfully remain in the workforce
- allow families to meet basic needs such as food, rent, clothing
- encourage and support work participation, keeping families off welfare
- bolster local economies
Local Economies Benefit Too
Because the majority of the federal and state funds claimed through income tax credits are immediately spent by families on their basic needs like utility bills, rent, and clothing, local economies benefit greatly too.
Significant Increase to Family Income
The largest and possibly most effective of the tax credits for working families are the federal Earned Income Tax Credit (EITC) and Minnesota's Working Family Credit (WFC). The sum of these two credits alone can potentially add more than 50 percent of needed income to a family's earnings:
What Are Each Of The Tax Credits, Who Is Eligible, And For How Much?
The links below provide some broad definitions of each of the tax credits and who is eligible. However, they should not be used as a comprehensive tax guide or legal reference.
How Do Families Claim Their Tax Benefits?
They have to file their federal and state tax returns, even if they do not earn enough money to be legally required to file. In fact, these are the families who are often the most likely to qualify for some of the benefits.
Why Is Outreach Needed?
It is very difficult to estimate at local level how many eligible taxpayers
fail to claim their earned income tax credits, but the best available
research suggests it is between 80-86 percent nationally. Certain groups
(families with incomes < $10,000, Hispanic and immigrant groups, and
taxpayers with no or more than two children) are least likely to claim.
If 5%-10% more of eligible taxpayers had claimed their credits for tax year
2001, then 11,000-23,000 more Minnesotans would have brought about $13-26
million more in federal funds into the state, and about $4-9 million more in
state funds into local communities.
Importantly, eligible taxpayers can file three years back for unclaimed tax credits. That means some families are eligible for thousands more dollars.
Tax Credit Outreach Materials
What Are Some Of The Policy And Practical Issues Surrounding Family Tax Benefits?
Predatory Lending Practices
Many low- to moderate-income families have their taxes prepared by commercial tax preparers, but many of these preparers take advantage of the families and persuade them to borrow against their anticipated tax refund. These loans called Refund Anticipation Loans (RALS) often carry extremely high fees and interest rates—the average APR was 166% in 2002. While the issue needs to be addressed at the federal level, CDF Minnesota and Mid-Minnesota Legal Assistance helped to pass state legislation in 2003 that created some standards of conduct and tightened disclosure laws. To learn more, click here.
Increasing Barriers For Families To Claim Tax Benefits
Precertification for the EITC
Beginning this December, the IRS will require a subset of EITC families to provide supplemental verification (e.g., school records, employment records) that any child claimed for the EITC lived with the claimants for more than six months during 2003. This will make the EITC more difficult to claim for these families. To learn more, click here.
What Are Some Of The Potential Solutions?
CDF Minnesota recommends:
- Simplify the rules and process.
Working families should be able to complete their own taxes, without having to pay for professional assistance. Federal and state laws, especially those that govern working family's income taxes, need to be simplified, and federal and state tax credit programs need to be coordinated. Requiring families to provide more documentation when they file their taxes will create more barriers.
- Increase the availability and accessibility of free tax preparation assistance.
Public and private, national and local organizations need to understand the community benefits of the tax credits and then invest resources into helping people access them. Different levels of government, employers, foundations, churches, and other community groups can all provide financial assistance, make site locations available, donate computers for electronic filing, and help recruit volunteers.
- Expand outreach efforts and educate eligible families.
Families need to understand that they are eligible for tax credits, but also that free tax assistance is available. They also need to understand the drawbacks and hidden costs of Refund Anticipation Loans and what their alternatives are.
- Connect more low-income families with financial institutions and increase their financial literacy.
On average, it takes the IRS less than 10 days to process an electronically files return and send an eligible taxpayer any outstanding refund—if they can send the refund to a bank account. But 1 out of 4 families with incomes less than $25,000 bank accounts do not have a bank account of any kind. Recent efforts to partner free tax assistance with financial institutions have proven successful elsewhere.
- Strengthen consumer protection.
There is extremely little regulation of tax preparers—they are not even required to have a high school education. Yet, they are entrusted with personal information and expected to stay abreast of many complex tax laws. The federal and state governments could do more to regulate and monitor the practices of paid preparers as well as the national banks with which they partner to offer Refund Anticipation Loans.
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