Tax Breaks for the Non-Rich: Survival TIps for the 'New Economy'

by Mike Thompson

                Your household income can rise beyond $30,000, maybe even close to $40,000 and if you have a child in your home the federal tax code considers you to be low-income, or at least sort of low-income.

                Guess what? You qualify for the federal Earned Income Credit. Even though you won't get as much of a break as somebody with a lower income, it's still real money and you will miss out if you don't know the details. Furthermore, you qualify to have your taxes prepared for free by a trained expert.

                This is just one of many examples that can allow you to reap more cash from your tax return. You can learn, and gain, if you invest just a few hours with a pair of free tax services in Saginaw County.

                First there is VITA, Volunteer Income Tax Assistance, operated through United Way of Saginaw County. Call 755-0505. Secondly, there is the Income Tax Preparation Program at the Saginaw County Community Action Committee, CAC. Call 753-7741.

                For now, here is some other valuable tips to consider:

                • Interest rates on some "rapid refund" or "refund anticipation loan" promotions, such as those offered by used car dealers and furniture stores, can exceed 200 percent. These sometimes are worse than payday loans or rent-to-own credit. Media ads already have started, but if you can hold your horses and wait until late January or early February to file, you can save yourself hundreds of dollars by waiting for just a week or two. And you still can file online. Why give away $800 of your $4,000 refund, just to get the money a week or two sooner?

                • You don't have to be low-wage to receive tax credits. There also are various credits for what would be considered low-middle income. The Earned Income Credit is just one example.

                • If you did not file a federal form in the past because you don't owe any taxes, you possibly should file anyway. You may qualify for credits that will bring you some cash back, without affecting your eligible status for other benefits.

                • If you contact the VITA or CAC tax preparation programs, and if you learn you have missed out in the past, there still is hope. You can go back three years to amend previous tax returns.

                • Both the Earned Income Credit and the Child Tax Credit are expanded this year. This was part of the same federal legislation that enabled the $700 billion-plus Wall Street bailout. Odd, don't you think, that there was virtually no publicity for this?

                • The State of Michigan is adding its own Earned Income Credit, which will amount to 10 percent of your federal credit.

                •  You don't have to be a homeowner to receive the state's Home Heating Tax Credit. There is a provision for renters as well.

                • Even if you cannot personally gain from this knowledge, you probably have friends and relatives who would benefit. Please help spread the word.

Billions of Dollars Not Received

                For the most part, upper-income and wealthy people attain their maximum tax benefits (and 'then some). They know they have a great deal at stake, and so they take personal interest and/or employ tax preparation professionals.

                Low and low-middle income people have the greatest needs for tax credits, but they are the most likely group to miss out, according to the Center for Budget and Policy Priorities. This is not because people are lazy or ignorant. They simply fail to realize that there also are nooks and crannies in the tax code that apply to them.

                For example, the Center reports that 23 million families last year claimed Earned Income Credits worth $44.6 billion. However, another 5 million eligible families did not file for these EICs. This is despite the fact that a family with one child can qualify for up to $2,917, and a family with two children can reap up to $4,824.

                For another example, do you recall those original George W. Bush "economic stimulus" checks last spring that were for either $300 or $600? According to the Center, there were 20.5 million low-income senior citizens, disabled veterans and other people with disabilities who normally did not file tax returns, but they had to file a "zero-owed" form in order to get the stimulus check. Some 16 million learned that they needed to do this, but another 4.5 million did not, and they missed out.

                The folks at the IRS decided to give these 4.5 million people a second chance, if they file for what is known as a Recovery Rebate Credit. These people need to realize that they really do qualify, even though they pay no taxes, but that they must file a form. They also need to realize that this $300 or $600 boost will not affect other benefits that they already receive, such as Medicaid or food stamps.

                Yes, indeed, these tax questions can become complicated. That's why the VITA and the CAC free tax preparation services are so valuable.

Welfare Reform and Tax Credits

                A point of political history is involved. Most people are aware of debates regarding the pros and cons of welfare, but fewer people realize that various low-income tax credits are a political result of these debates.

                During the 1960s, the now-departed Senator Daniel Patrick Moynihan first suggested the concept of a "negative income tax." He proposed that the lowest-income workers not only would pay no federal income taxes, but that they would receive credits for working. Therefore, the term "negative tax" is based on mathematics, not on a negative attitude.

                The first goal of Moynihan's negative income tax concept was to encourage more people to work, rather than feeling they would be better off on the public welfare dole. Second, just as important, the negative income tax would allow the federal government to hold the minimum wage in check, an idea that was highly popular with business owners.                                 Instead of higher wages, the working poor would receive tax credits.

                The concept of a negative income tax is embodied at the lower end of the Earned Income Credit, as well as the Child Tax Credit. President-elect Barack Obama is facing criticism for his desire to expand these credits, but Moynihan's negative income tax originally was considered a conservative idea that was embraced by the likes of Richard Nixon, Ronald Reagan and especially Bill Clinton. (So Sean Hannity – shut up and take a seat!)

Don't Assume You Aren't Eligible

                The Center for Budget and Policy Priorities pushes local groups to establish "Tax Credit Outreach Campaigns." Organizers from the Washington-based nonprofit group say their two main challenges are to convince skeptical people that they are eligible for these credits. Some people think they earn too much money, while others perceive that they don't earn enough.

                Details may seem endless. Here are a few more items:

                • The minimum income to qualify for the Child Tax Credit is reduced to $8,500, down from the previous $12,050. However, if someone failed to qualify in the past and is not made aware of the change, they will fail to claim the credit on their tax return.

                • To provide relief to homeowners caught in the current mortgage crisis, some families will qualify to exclude forgiven mortgage debt from their income.

                • Some first-time homebuyers may qualify for a separate credit.

                • Money contributed to retirement and education savings plans may be excluded in determining eligibility for food stamps. (About 1 in 4 Michigan families who are eligible for food stamps do not claim them.)

                • You possibly can increase your weekly pay by asking your employer for an Advance Earned Income Credit. Your refund won't be as big next year, but you will get some of the money in advance, instead of the government earning interest. Ask your employer for Form W-5, or call 1-800-TAX-FORM.

                There's more. As an everyday citizen, you need not know all of these ins and outs. They key is to be aware of resources, such as the VITA and CAC tax preparation programs, as well as reputable companies that charge fees. It's also important to steer people away from "rapid refunds" or "refund anticipation loans" that exploit low-income people.

                VITA tax preparation begins on January 26. Sites include Butman-Fish Library at 1716 Hancock (9 a.m. to 3 p.m. Mondays and Tuesdays, 9 a.m. to noon Wednesdays); National City Bank at 1140 S. Outer Drive (9 a.m. to 3 p.m. Thursdays and Fridays); Hoyt Library at 505 Janes (9 a.m. to 1 p.m. Fridays); Town & Country Family Credit Union at 2796 Erna (by appointment); and Frankenmuth Credit Union at 580 N. Main (by appointment). To repeat, the number is 755-0505.

                CAC tax preparation begins February 2 and is offered from 9 a.m. to 4 p.m. Mondays through Fridays at the CAC Center, 2824 Perkins. Call 753-7741.

                Anyone who wishes to obtain a package of tax information and outreach materials may simply visit the Center for Budget and Policy Priorities' website at www.cbpp.org/eic2009, or call 1-(202) 408-1080.

                To learn the potential amount of your Earned Income Credit, check the Center's EIC Estimator at www.cbpp.org/eic2009/calculator/eitcchoose.htm.