As startling as it seems, the IRS estimates that each year 1 in 4 eligible Americans misses out on money the government owes.
That’s because people fail to file for something called the Earned Income Tax Credit, worth up to $5,981 for 2012. It’s available to anyone who worked even part of the year and earned below a certain limit — for instance, $50,270 for a married couple with three dependent children.
Developed in the 1970s as an incentive to move adults from welfare to work, the earned-income credit has been a powerful force in lifting people out of poverty, financial experts say. In 2010, the federal government estimates, the credit helped to boost about 6 million Americans — including 3 million children — above the federal poverty line by qualifying them for refunds.
Not only can it have a profound effect on a family’s budget, but the credit also helps the economy overall. Money saved with the credit often goes to buy groceries, pay off debts, cover car and home repairs, and catch up on bills.
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So why would anyone neglect to claim it?
“There are two big reasons,” said Mark Batchelor, manager of financial-stability initiatives for the Heart of Florida United Way, which is running an awareness campaign on the issue. “The first is that people who are financially insecure are often too busy taking care of their lives to seek these things out. And second, the recession knocked a lot of people who wouldn’t normally qualify into that tax bracket.”
Workers who lost their jobs or had their hours cut last year may be eligible for the first time. After all, Batchelor notes, the credit isn’t just for the working poor. A household income of $50,270 is very much in middle-class territory.
It’s also important for workers to realize that, to get the credit, they have to file a tax return.
“Even if you’re making less than $10,000 and you don’t have a filing requirement, the only way you’re going to get any credit (or refund) is if you file a tax return,” said Carolyn Spohrer, deputy director of Virginia Community Action Partnership, an anti-poverty group. “And to some people that’s scary.”
For Teresa Martyny, a 34-year-old single mother from Orlando, Fla., it wasn’t fear but ignorance that stopped her. Only after she adopted her son four years ago did she learn about the credit from a co-worker.
“Before that, I didn’t even know that I qualified for it,” she said. “I had just been doing my taxes on my own.”
At the time, she was working for a rape-crisis program. Now she works for the United Way’s call center, and she tries to help spread the word about the credit. Rather than spend the refunds immediately, she socked them away in savings, and a year and a half ago she used the money as a down payment on her first home.
“When you save up $5,000 every year,” Martyny said, “it can make a humongous difference.”
Yet advocates for low-income workers worry that this year — with the late start of the tax-filing season — the number of workers who overlook the credit will be even higher than usual.
“That entire fiscal-cliff debate in Congress led to a lot of confusion,” including the delay of beginning of the tax season this year, said Ed Black, president and CEO of the Computer and Communications Industry Association, a trade group that helped develop a new website devoted to the issue, . “This delay and confusion comes with the normal confusion we have at tax season.”