Working Families Risk Losing Essential Credits this Year: Spread the Word
Since the beginning of the pandemic, SaverLife members have suffered a significant loss of income—73% of SaverLife members continue to report that they are unemployed or have lost hours as a result of the pandemic. In addition to struggling to pay rent and provide food for their families, working families are also facing a major financial loss - the potential erosion of essential resources, like the Earned Income Tax Credit (EITC). Even if they do not owe any income taxes, eligible workers can receive a refund through the EITC.
What is the Earned Income Tax Credit?
The Earned Income Tax Credit is a credit to working people with low incomes: it provides thousands of dollars in critical support, especially those with children. The size of the credit depends on household income and the number of dependent children. For most, the EITC results in thousands of dollars of extra cash in their tax refund and represents the single largest cash infusion all year. SaverLife families use the EITC as a critical lifeline to pay off medical debt and credit cards, and bolster emergency savings cushions.
Incomes are down, so why would tax credits be smaller?
It may seem counterintuitive that a government program designed to support working families would be smaller in a year when incomes for many are lower. But the structure of the EITC means that the size of the credit decreases for every dollar earned above $25,000, and also decreases for every dollar earned below $15,000 (see chart below). This means that someone who earned $18,000 in 2019 but only $13,000 in 2020 would receive a smaller Earned Income Tax Credit.
Source: Tax Foundation
What does this mean for SaverLife members?
To understand the breadth of the impact on SaverLife members, we surveyed 581 members to estimate EITC amounts received in 2019 and 2020.
The results show that nearly half of SaverLife members risk receiving a smaller EITC payment in 2021, and nearly a quarter could receive a payment that is $500 less than it was a year ago. Given recent research showing that savings balances of just $100 can make a huge difference in warding off negative outcomes such as having utilities shut off, or having to take on high-cost debt, and given previous research showing that members typically save about half of their refunds, this potential for far diminished EITC will have disastrous consequences for many families.
Tax credits are a vital source of financial security
Two data points illustrate just how important this tax credit is to low-income families. First, when asked how important tax refunds are to their financial security, 55% of members earning under $25,000 said it is either essential to cover basic expenses, or so important that it would be tough to get by without it.
Another data point that shows how vital this income is to low-income families is when families plan to file their taxes. Almost 80% of SaverLife members with household incomes under $25,000 in 2019 plan on filing by February.
People Can avoid losing their EITC, but it’s complicated
Fortunately, Congress recently passed legislation to send Americans $600 stimulus checks and increased unemployment insurance. The bill also included a “look back” provision allowing families to choose which year’s income, 2019 or 2020, to use in order to maximize one’s EITC. This provision would, for example, allow a family to use their 2019 income of $18,000 for EITC calculation purposes, instead of a 2020 income of $13,000, enabling them to claim a larger tax credit.
This provision hasn’t been widely publicized, so SaverLife is currently working with Commonwealth and Neighborhood Trust to test messaging aimed at raising awareness among EITC eligible families and also help our members figure out what steps to take to maximize their refund. We will be sharing these actionable steps with our members and our partners as soon as possible.
It’s going to take effort on behalf of everyone, tax preparers, members of the SaverLife community, financial technology companies, and non-profit organizations, to get the word out and ensure millions of people aren’t leaving critical tax credits on the table. To join us, please visit taxtimecrisis.org to sign up for updates.