|March 26, 2008
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WASHINGTON, D.C. — Low-income families lost billions in tax year 2005 in Earned Income Tax Credit (EITC) benefits to high-interest, short-term loans, tax preparation fees, and other financial products issued by commercial tax preparers, according to a Children’s Defense Fund (CDF) report released today. With the tax filing deadline fast approaching and millions of families expecting to receive economic stimulus payments later this year, the report warns low-income families to avoid Refund Anticipation Loans whose high interest rates cause families to forfeit a significant percentage of their refunds in order to receive their money a little earlier. According to CDF’s analysis of newly released data from the Internal Revenue Service (IRS), Refund Anticipation Loans, commercial tax preparation services and financial products cost lower-income tax filers who claimed the EITC $3 billion for 2005.
“Nearly 13 million children in America live in poverty which costs our nation half a trillion dollars in lost productivity, poorer health and increased crime every year,” said CDF President Marian Wright Edelman. “Helping their working parents get and keep the tax credits they have earned lifts millions of children out of poverty. When money instead goes to pay for high-interest Refund Anticipation Loans from predatory commercial tax preparers, families lose important income and the local economy loses important revenue.”
The EITC is a federal tax credit designed to supplement the earnings of low- to moderate-income workers and is one of the most effective tools for lifting families above the Federal Poverty Line which is about $21,000 a year for a family of four with two children. According to CDF’s analysis of IRS data, in tax year 2005 more than 22 million taxpayers received the EITC with an average benefit of nearly $1,900. The most recent estimates show that the EITC lifted 4.4 million low-income Americans out of poverty—including 2.4 million children. But because of commercial tax preparers’ aggressive marketing of Refund Anticipation Loans to working families who are poor and of low financial literacy, many of these same families turn to Refund Anticipation Loans unnecessarily. These Refund Anticipation Loans often carry triple-digit interest rates and can cost a taxpayer a sizeable portion of his or her refund, all for only a slightly quicker return. According to the report in 2005 the states with the highest proportion of EITC recipients who obtained a Refund Anticipation Loan were Alabama, Arkansas, Mississippi, North Carolina, and South Carolina. To see how much money in EITC benefits each state lost to Refund Anticipation Loans, tax preparation fees, and other products used to access tax refunds, visit CDF’s clickable map at www.childrensdefense.org/taxesmap.
The report asks individuals, communities and policymakers to step up and take action that lifts children out of poverty by helping their working families keep more of the money they’ve earned:
- Local communities can expand access to free tax preparation by opening more free tax preparation sites in their communities to give families a viable alternative to predatory commercial preparers. In 2007, CDF and its partners ran more than 200 Volunteer Income Tax Assistance sites in 11 states that helped low-income working families collect more than $150 million in tax returns.
- Local business and civic leaders can increase lower-income families’ access to banking servicesby establishing public-private partnerships to provide alternative routes to financial planning that help families invest and grow their funds.
- State policymakers can institute state EITCs nationwide to help low-income families and stimulate their local economies. Only 22 states and the District of Columbia currently have a state EITC.
- Congress can strengthen consumer protections. Lawmakers can pass legislation that would ensure commercial tax preparers fully disclose all rates and terms of loans so they are less likely to take advantage of low-income families.
To read the report in its entirety, or for more information on the Earned Income Tax Credit and VITA sites, visit www.childrensdefense.org/taxes.