A Newsletter for Individuals Concerned About Poverty in Missouri

Winter 1997

In this issue:

In the context of welfare reform, tax information for Missourians with low incomes becomes even more important. Unlike most benefits for low-income families, the Earned Income Tax Credit (EIC) remains intact for tax year 1996. In fact, the benefit is bigger than ever. The EIC can provide financial resources for those being moved into the workforce at low wages.

This Poverty At Issue provides an update on the EIC and gives other sources of EIC information. It also contains information about the Child and Dependent Care Credit, another important tax benefit for families. Tax filing options and sources of help in filling out returns are also provided, as well as information about a tax credit for employers who hire new workers from certain targeted, low-income groups.

I hope you find the information helpful.

Brenda Procter
Consumer and Family Economics Specialist

Extra Money for Workers
The Earned Income Credit

The Earned Income Credit (EIC) is a special federal tax benefit for workers who earn low or moderate incomes. Its purposes are to reduce the tax burden on these workers, supplement wages, and make work more attractive than welfare. Because the emphasis of the new federal welfare law is on moving welfare recipients into jobs, EIC outreach is more important than ever. Many workers who have never filed a tax return will be entering the job market. They may not realize that the EIC is available to ease part of the financial burden during the transition. Single or married people who worked full time or part time at some point in 1996 can qualify for the EIC, depending on their income. The EIC is in its final year of an expansion which began in 1993.

Who Can Get the EIC and How Much is it Worth?

This year, the EIC can be worth as much as $2,152 for workers who were raising one "qualifying" child in their home and had a family income less than $25,078 in 1996. Workers who were raising two or more "qualifying" children and who earned less than $28,495 can get up to $3,556. An EIC of up to $323 is also still available to workers who were not raising children, were between ages 25 and 64 on December 31, 1996, and had a family income below $9,500.

A "qualifying" child can be a son, daughter, stepchild, grandchild, adopted child, niece, nephew, child of a friend, or foster child. Children must be under age 19 (or 24 if they are full-time students). Totally and permanently disabled children of any age also are considered "qualifying" children. A child does not have to be claimed as a dependent to qualify a worker for the EIC. An own child, stepchild, grandchild or adopted child must live in the home for more than half the year. Nieces, nephews, friends' children, or foster children must have lived with the taxpayer all year as a member of the family.

Who Benefits from the EIC?

Children are more likely to be poor than Americans of any other age group.The largest EIC benefit is for working families with two or more children.The EIC can help offset the costs of child care, clothing, school supplies, and other needs.

The EIC also provides a financial boost to people who work at very low wages or are only able to find part-time work: day laborers, migrant workers, temporary employees, homeless people, general assistance recipients who worked part of the year, and others. About 4.2 million such workers received this credit for tax year 1994.

State and local economies benefit from the EIC. Last year, some 382,000 Missouri families received more than $496 million in EIC benefits. For the State of Missouri, the EIC's economic impact is more than $1 billion. By design, the EIC is an economic development tool for low-income neighborhoods and communities. Most EIC benefits are spent locally.

How Does the EIC Work?

Eligible workers get a check from the IRS if the EIC is more than the taxes they owe at the end of the year. Or the EIC benefit can be used to reduce the amount of taxes owed at year's end. Eligible workers who don't owe any taxes at all and aren't required to file a tax return can still get the EIC if they file a return. Some workers who are raising children have the option of getting part of their EIC in their paychecks throughout the year and part in a check from the IRS after they file their tax return. This is called the advance payment option.

For many workers, the advance payment option can make a difference in paying the rent, buying groceries, and meeting daily expenses. Workers earning between $490 and $1045 per month can get about $100 per month added to their paychecks.

Does the EIC Affect Welfare Benefits?

In most cases, the EIC does not affect benefits like AFDC, Medicaid, Food Stamps, SSI, or public or subsidized housing. The EIC does not count as income in figuring eligibility. However, the EIC can count as a resource in determining eligibility for AFDC and SSI if it remains in the taxpayer's bank account at the end of the calendar month following the month it was received. For example, if Ms. Johnson receives her EIC check on February 20, it will be included as a resource if it is in her bank account on March 31. In many cases, it would not be enough to make a difference in eligibility, but it is possible. Under the new Temporary Assistance for Needy Families (TANF) block grant, each state will have the option of changing this rule. The AFDC rule remains in effect until states file their new plans under the TANF block grant. In determining Food Stamp eligibility, the EIC is not counted as a resource if it is spent within 12 months of receiving it.

Are Immigrant Workers Still Eligible for the EIC?

Yes, many legal immigrants can still qualify for the EIC. This is in spite of the fact that most legal immigrants will no longer qualify for welfare benefits.

Can I Claim the EIC for Past Years?

Workers can file for the EIC for the last three years, provided they met all the rules in effect for those years. All they need to do is fill out a Form 1040X and attach it to a copy of the tax form filed for the year in question. A schedule EIC would also be needed. For copies of prior-year forms, call 1-800-TAX-FORM.

EIC and Social Security Numbers

Taxpayers must provide valid Social Security numbers for everyone listed on the tax return, including infants born before December 1, 1996. The IRS now verifies the Social Security number of every adult claiming the EIC, as well as the Social Security number of every child in families claiming the EIC, before it sends out payments. The IRS also checks to be sure that no child is claimed more than once. If more than one adult does file for the EIC for the same "qualifying" child, both adults will be required to provide proof that the child lived in the home for the necessary time period. Workers who file paper returns that are missing Social Security numbers will get a notice from the IRS requesting the missing information. This can delay processing.

It also is important to be sure that each name and Social Security number appears on the tax return exactly as it appears on the Social Security card. To apply for Social Security numbers or get a copy of lost cards, call 1-800-772-1213.

The enclosed EIC fact sheet from University Extension gives more details about the EIC and explains the process for filing for it. You also can call the IRS at 1-800-829-1040. Or call your local University Extension office and ask to speak with a consumer and family economics specialist in your region. The Center on Budget and Policy Priorities offers a free EIC outreach kit to those who wish to publicize the EIC locally. Call 202-408-1080 or fax to 202-408=1056.

IRS to Send Formless Tax Packages to Millions

In an effort to encourage millions of American taxpayers to file their returns by telephone next year, the Internal Revenue Service will send them something very different - a tax package with a worksheet instead of a tax form. The TeleFile package will be sent to over 22 million taxpayers inviting them to use this paperless tax filing system. TeleFile requires a touch-tone telephone call lasting less than ten minutes. Last year nearly 3 million taxpayers filed through TeleFile, and over 99% of them were so satisfied they said they would use it again.

"People who use TeleFile like it," said IRS Commissioner Margaret Milner Richardson in announcing the TeleFile program for the next filing season. "We are confident many more taxpayers will try it during the 1997 filing season."

The TeleFile program has been enhanced to allow telephone filing by married couples filing a joint return as well as by singles. TeleFiles saves time and money for taxpayers and the IRS, because it eliminates many errors and can speed the issuance of refund checks. Taxpayers can get their refunds even faster by choosing to have them deposited directly into their bank accounts.

Taxpayers eligible to use TeleFile are those with no dependents, taxable income of less than $50,000 from wages, interest or unemployment compensation, and the same mailing address as the year before. Those who receive a TeleFile package but are unable to use it - for example because they changed their address or now can claim a dependent - can easily get the tax forms they need from the IRS. The easiest and quickest way to get tax forms and instructions is from the IRS Internet Web Site at www.irs.ustreas.gov. Forms are also available by fax through IRS TaxFax, by phone, and from many banks, post offices and libraries.

Tax Filing Options
Is a "Quick Refund" Worth It?

Many taxpayers who receive the EIC do not fill out their tax forms themselves. They may not know how, there may be a language barrier, or they may fear making a mistake. Whatever the reason, estimates suggest that as many as two-thirds of EIC recipients pay someone to fill out their tax returns. According to the Center on Budget and Policy Priorities, payments to tax preparers by EIC recipients totaled about $350 million in 1992. There are several options available to taxpayers.

• Fill out the forms yourself.
  Many people underestimate how easy it is to fill out a simple tax form. Instructions for the 1040, 1040A, and 1040EZ include worksheets and tables. IRS Publication 596, "Earned Income Credit," contains helpful examples. Call 1-800-TAX FORM for a free copy. You don't even need to calculate the EIC as long as you give the necessary information. The IRS will figure it for you.
  
  
• Get free help.
  In some Missouri communities, the Volunteer Income Tax Assistance (VITA) program offers free tax preparation to low-income workers. VITA sites are open around the country from late January through April 15. Unfortunately, many communities in Missouri do not have VITA sites. In some communities, Tax Counseling for the Elderly (TCE) sites are available and many also offer help to low-income taxpayers needing assistance with tax returns. VITA and TCE coordinators are trained by the IRS. Some sites even have a computer to file a return for a quicker turnaround on a refund.
  
  Community leaders can organize a local VITA program and receive volunteer training from the IRS. To find out how or for a list of VITA sites in your area, call the IRS Regional Taxpayer Education Coordinator in St. Louis at 314-539-3660. By providing free tax filing assistance to low-income taxpayers, volunteers can help keep dollars from leaving the community and ensure that families keep more of their refunds.
  
  
• Pay a commercial tax preparer to fill out the forms.
  Commercial tax preparers typically offer three basic services: help filling out tax returns by hand ($25-$40 for the typical EIC filer); electronic filing (usually another $25); and quick-turnaround "refunds" (usually another $30 to $60).
  
  Paying for tax preparation takes money away from EIC benefits. This runs counter to a primary goal of the EIC_improving people's financial stability. This is one reason IRS offers VITA.
  
  A "quick refund" can be very expensive. If you look at it like the loan it really is, the annual interest rate can be as high as 175%. If, for some reason, the refund doesn't come back in the amount expected, the taxpayer will still have to repay the commercial preparer the difference. If a taxpayer files electronically but doesn't ask for a quick refund, the refund will come back more quickly than if the return had been filed on paper.
  
  

Another Tax Benefit for Families
Child and Dependent Care Credit

The Child and Dependent Care Credit helps families pay for child care they need in order to work or look for work. It can also be claimed by families that must pay for the care of a spouse or adult dependent who is incapable of self care.

The Child and Dependent Care Credit can reduce the amount of federal income tax a family pays in two ways:

• For families that do not owe taxes at the end of the year, the credit can give them back some or all of the federal taxes that were taken from parents' paychecks during the year.
  
• For families that end up owing taxes at the end of the year, the credit can lower the amount they must pay to the IRS.
  

The Child and Dependent Care Credit differs from the EIC. While families earning too little to owe federal taxes can get the EIC, families earning too little to owe federal income tax cannot use the Child and Dependent Care Credit. Getting the EIC does not affect a family's eligibility for the Child and Dependent Care Credit. Conversely, getting the Child and Dependent Care Credit does not affect a family's eligibility for the EIC. Taxpayers who qualify for them both can take advantage of both credits. This may mean even more money back from the IRS. The credit can be worth up to $1440 for families with more than one child or dependent receiving care.

To get more detailed information about the Child and Dependent Care Credit, call the National Women's Law Center at 202-588-5180, or send them a written request to 11 Dupont Circle, Suite 800, NW, Washington, DC 20036. Families can also get free information from the IRS by calling IRS at 1-800-TAX-1040. Hearing impaired taxpayers can call 1-800-829-4059.

Employers Can Get Tax Credit for New Hires

Employers can get a tax credit of up to $2,100 if they hire employees from one of seven targeted low-income groups. The credit_generally 35 percent of the first $6,000 in wages_applies to employees who start work after September 30, 1996, and before October 1, 1997.

The targeted groups are:

• qualified recipients of Aid to Families with Dependent Children, or its successor (Temporary Assistance to Needy Families_TANF) under welfare reform;
  
• qualified veterans;
• qualified ex-felons;
• high-risk youth;
• vocational rehabilitation referrals;
• qualified summer youth; and
• qualified food stamp recipients.

To help employers determine if a worker will make them eligible for this tax break, the IRS has developed Form 8850, "Work Opportunity Credit Pre-Screening Notice and Certification Request." This form is available to computer users through the IRS home page _ http://www.irs.ustreas.gov _ or by modem directly to 703-321-8020 (not a toll-free number). Employers may also request Form 8850 by calling (toll-free) 1-800-TAX-FORM.

The employer will get information from a job applicant about the potential membership in a targeted group, completing Form 8850 on or before the day the job is offered. The employer then submits the form, signed by both employer and employee, to the state employment service agency within three weeks after the employee starts work. If the employee qualifies, the state agency will certify the employee's membership in the targeted group. The employer should keep copies of Form 8850, transmittal letters and any other documentation related to the Work Opportunity Tax Credit for three years after filing the tax return claiming this credit.

Sources:
Center on Budget and Policy Priorities
Internal Revenue Service

To Poverty At Issue

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For ADA accommodations, contact ADA project Director, Jim de Jong, 4816 Santana, Columbia, MO 65203, 1-800-949-4232.

Jeanne Bintzer, HES Extension Site Administrator
bintzerj@missouri.edu

Brenda Procter, Consumer and Family Economics Specialist, Content Provider
procterb@missouri.edu