Free tax preparation as a way to build individual assets

About the Author

CED Guest Author

Lisa Stifler is a Research Associate with the Community & Economic Development Program.

With tax season now upon us, dozens of community organizations and groups throughout North Carolina are beginning to open their doors to offer free tax preparation for low- and moderate-income individuals, the elderly, and military personnel and their families.  While the tax prep sites are relatively short-term initiatives, offering free tax preparation for eligible individuals can lead to long-term benefits for those receiving the services.The Earned Income Tax Credit (EITC) is a federal (and beginning in 2008, state) income tax credit available to low- and moderate-income working individuals and families.  Congress passed legislation for the EITC in 1975, with the idea that the tax credit would offset social security taxes and provide an incentive to work, and it has gradually expanded ever since.  To be eligible for the EITC, a tax filer must be low- or moderate-income (the exact upper income amount is set annually), be employed in the tax year, and file his or her taxes.  A tax filer does not need to have children to be eligible, but the amount of the credit is less if the filer has no children.  Because the EITC is a tax credit, not a deduction, the credit offsets any taxes owed and can result in a refund to the tax filer.  The most cited benefits of the EITC are that it supplements wages for low-wage earners, lifts individuals and families (particularly children) out of poverty, and stimulates local economies.

In NC in 2006, almost 784,000 households claimed the federal EITC (around 20% of all tax filers in the state), totaling more than $1.55 billion, or an average of $2,012 per household.  However, it is estimated that more than $100 million in EITC money was left unclaimed in NC in 2005 (the most recent estimate date).  (Click here for the report that discusses the under-utilization of work supports, including the EITC, in NC and nationally.)  In addition, much of the EITC dollars that could go to low- and moderate-income tax filers gets eaten up by refund anticipation loans and refund anticipation checks offered by for-profit tax preparation sites.  In fact, in NC in 2006, 2 in 5 EITC recipients took out a refund anticipation loan that year, and 1 in 5 recipients used a refund anticipation check.  In rural NC, a higher percentage of tax filers are recipients of the EITC than urban tax filers, and the average EITC amount is greater than for rural tax filers.  (Click here for the report.)  Further, of the top ten communities where refund anticipation loans were most prevalent in 2006, nine of them are in rural counties and all have poverty rates of more than 25%.  (Click here for the data; see page 6.)

These facts underscore the importance of the availability of free tax services for low- and moderate-income rural wage earners who are eligible for the EITC  and other tax credits.  Further, free tax preparation can be linked with other asset building tactics that can increase household economic stability, among many other benefits.  These additional asset building tactics include financial education, one-on-one financial counseling or coaching, developing partnerships with and linking clients to local banking institutions and appropriate financial products, and individual development accounts (IDAs) and other savings programs.  Over the long term, the free tax preparation services, the refunds received, and the additional services offered  not only supplement wages , but can put money into the local economy and help individuals and families build assets and economic stability for themselves and for the future.

However, reaching out to rural residents is a challenge for a variety of reasons.  Two NC groups have been particularly effective at reaching out to EITC-eligible rural residents and combining the tax preparation  with other services.  Northeastern CDC, in Camden County, has succeeded at reaching out to residents in the rural county, particularly among the Latino population.  Although Northeastern CDC uses more traditional forms of outreach, such as PSAs on local radio stations, advertising with area churches and popular businesses, and cross-marketing its programs, much of the marketing has occurred over the years through word of mouth, as they are one of the only free tax prep sites in the county and the only one that serves the Latino population.  Northeastern CDC also combines its tax prep services with a variety of workshops geared towards the needs  of the clients, including workshops on banking and bank accounts, financial education, savings, and other topics as needed.

In Wilson County, the Wilson County Department of Social Services combines a variety of its services to help low- and moderate-income working families by using each interaction with clients to connect them to other services.  In relation to the EITC, the agency offers free tax preparation services to eligible individuals and families, and then uses those interactions to connect the families with financial education courses, individualized financial coaching and counseling, faith-based and other community resources, and even a local IDA program that promotes savings among low- and moderate-income families.

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