LEXINGTON, KY - Each year, Kentucky's economy misses out on an estimated $95 million because eligible families do not claim the federal Earned Income Tax Credit (EITC). The Internal Revenue Service (IRS) reported that in 2002, Fayette County had $22.2 million left in unclaimed EITC funds.
The EITC is the largest federal work support program in the country - $37 billion in tax relief annually, bringing over 2.5 million children above the poverty line every year. Created in 1975, the EITC was expanded under Democratic and Republican administrations in 1986, 1990, 1993 and 2001. This tax credit reduces taxes for workers, supplements wages and provides a method of financial resource for filers. It can increase the effective wage of qualifying workers up to $2 an hour.
A number of factors determine who qualifies, including number of children, but households earning less than $49,000 should be aware of potential eligibility. The IRS estimates that 20 percent to 25 percent of qualifying workers miss out on thousands of dollars each year by failing to claim their EITC. This includes workers who live in rural areas, the self-employed and those who are recently divorced or unemployed. Most EITC benefits are collected by suburban and rural residents. According to the Annie E. Casey Foundation, 4.6 million urban EITC filers claimed $8 billion in EITC benefits, while 14.3 million non-city residents collected $24.1 billion in 2001. According to Kentucky Youth Advocates, about 20 percent of Kentucky tax filers claim the federal EITC. Analysis from the Brookings Institute shows low participation among eligible recipients across Kentucky.
For the 2008 tax year, there were 376,000 EITC recipients in Kentucky, averaging $2,007. That is a total of $755 million in EITC money given to Kentucky. Conservative estimates say that for every $1 in EITC funds received, there is a $1.50 economic impact locally. Using this conservative estimate, the EITC could stimulate Kentucky's economy by $1.132 billion. This figure does not include eligible Kentucky households that do not claim EITC.
An Associated Press-GfK poll of 1,002 American adults conducted in April 2009 found that 54 percent of the respondents planned to use their refunds to pay off bills. The poll also found that 5 percent were planning a shopping spree. However, those making less than $50,000 were more likely to use their refunds for everyday items and household expenses, stimulating the local economy.
One way to get that money into taxpayer hands and back into the economy is by raising awareness of nearly 200 free tax preparation sites in Kentucky. Locally, there are 22 sites offering free tax preparation assistance (www.assistance.ky.gov). The Kentucky Poverty Law Center in Lexington is one of six Volunteer Income Tax Assistance (VITA) coalitions serving Kentucky. In 2009, this coalition prepared over 2,000 taxes, resulting in more than $2.6 million refunds for clients, whose average income was $19,000. Within this coalition is a site at the University of Kentucky College of Law. Student volunteers from the College of Law and the Gatton College of Business and Economics served about 420 low-income households last year.
In addition to free tax preparation sites, access to free online tax preparation software is also available to qualifying taxpayers. Those who are eligible for the EITC, those whose adjusted gross income (AGI) is below $31,000 and those who are active in the military with their AGI below $57,000 can file their own federal and state taxes at www.assetbuildinginc.org.
While free tax preparation is available, many taxpayers choose unnecessary refund anticipation loans (RAL). Up to 70 million taxpayers pay commercial firms to prepare their taxes. Some firms charge loan fees up to $130 along with add-on fees for e-filing or processing in the amount of hundreds of dollars, not to mention annual interest rates anywhere from 50 percent to 500 percent. The Consumer Federation of America reports that RALs drained the refunds of 8.4 million American taxpayers in 2008, costing them $738 million in loan fees plus over $68 million in other fees. A single organization, Central Kentucky Economic Empowerment Project (CKEEP), saved central Kentuckians $424,000 in tax preparation fees. By preparing and filing tax returns free of charge, each household saves an average of $150 to $250 in tax preparation fees for CKEEP clients.
Recently declaring February the federal Earned Income Tax Credit Awareness Month in Kentucky, Governor Steve Beshear encouraged Kentuckians to use the free preparation sites to help file taxes and determine eligibility for EITC.
"Studies show that 97 percent of those funds are then spent in our local communities," said Beshear.
Taxpayers who qualify for the EITC fall under $49,000 per household. These same taxpayers are more likely to spend that EITC in immediate needs, boosting the local economy with millions of dollars. Making that boost a reality depends on raising awareness of free tax preparation assistance throughout the state and informing fellow Kentuckians of their eligibility for the EITC, bringing millions of dollars into the Kentucky economy.