April 27, 2020

Tax Benefits Workers May Not Know About

By Barbara Jones and Disha Patel
You may qualify for tax benefits that you didn't know about

You may qualify for tax benefits that you didn't know about

(The pdf for the issue in which this article appears is available for download: Bifocal Vol 41, Issue 5)

By now, many low- and moderate-income Americans have received a $1,200 stimulus check. However, recently laid off and other low-wage workers may qualify for other federal and state cash tax benefits and not know it. The IRS estimates that about 21 percent of taxpayers who file returns do not claim the tax credits they deserve.[1] Surveys have also found that many low-wage workers whose income is below the amount required to file a return are unaware that it nevertheless might pay to file one.

While some workers may be familiar with nonrefundable tax credits, which reduce your taxes but generate no refunds, they may be less familiar with refundable credits. Depending on the filer’s income, refundable tax credits can actually provide cash payments to qualified low- and moderate-income workers even when their tax liability is zero. Since refundable tax credits are treated as taxes paid, they trigger cash payments to filers who have paid minimal or no taxes.

For example, a worker who has paid $1,000 in taxes but qualifies for a $3,000 refundable tax credit can receive a $2,000 “tax refund.” However, to obtain such refundable tax credits, workers must file a tax return and request the credit even if they do not owe any tax or are not required to file a return.[2] Workers also must have had some income in the prior year. Earned income is usually how most workers qualify, but disability retirement benefits received prior to retirement age also qualify.

Earned Income Tax Credits

Since its inception, the Earned Income Tax Credit (EITC) has been one of the largest means- based anti-poverty cash assistance programs and is widely regarded as one of the most successful. Not only does the EITC provide a benefit to low-wage workers, but the cash received also goes back into the economy, creating an economic stimulus. The amount of the federal EITC for the 2019 tax year varies between $529 for workers with no qualifying children and $6,557 for workers with three or more qualifying children. In addition to the federal EITC, 29 states, and the District of Columbia, offer a state supplement to the federal EITC. The specific amount of a state EITC varies per state between 9 percent and 45 percent of the federal credit.[3]

EITC Eligibility Requirements

  • Generally married couples must file a joint return and cannot be claimed as a dependent or qualifying child on anyone else’s return.
  • The individual or couple must meet specific income guidelines. See, EITC basic rules.
  • Eligible tax filers must reside in the U.S. for more than half the year.
  • Federal taxpayers without qualifying children must be at least 25 and under age 65 or have a spouse who is under age 65. However, tax filers over the age of 65 can qualify if they have minor children, grandchildren or stepchildren they claim on their return. Most state supplement EITCs follow the federal age guidelines with some exceptions, e.g., in California childless tax filers age 65-plus still qualify if they meet the other basic requirements.   

Other Credits

In addition to state and federal EITCs, laid off and other workers may qualify for other federal refundable credits:

  • Individuals and families who purchase health insurance through the Health Insurance Marketplace may also qualify for the premium tax credit to help with health insurance costs.
  • The American opportunity tax credit can help students pay for their first four years of higher education if they are enrolled at least half-time for at least one academic period.
  • The child tax credit can assist taxpayers supporting dependent children.
  • Some states also offer refundable rental tax credits even when the renter may have no income, while other states provide nonrefundable rental tax credits.

It’s not too late to claim EITC credits for the tax years 2016, 2017, 2018 and 2019, which can be done by filing a tax return for those years or amending an existing return. While many free tax preparer sites are closed because of the coronavirus pandemic, free online resources are available, such as Free File Alliance (www.freefilealliance.org), which partners with the IRS to help taxpayers e-file their taxes. AARP Foundation Tax-Aide (www.aarpfoundation.org/taxaide) has further information on filing taxes online.

[1] Statistics for Tax Returns with EITC, Internal Rev. Serv. (Jan. 16, 2020), https://www.eitc.irs.gov/eitc-central/statistics-for-tax-returns-with-eitc/statistics-for-tax-returns-with-eitc.

[2] IRS, Earned Income Tax Credit (EITC)https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit.

[3] The IRS provides a summary of each state’s specific supplement. See, IRS, State and Local Governments with Earned Income Tax Credits, https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/states-and-local-governments-with-earned-income-tax-credit. New York City provides an additional supplement to its residents on top of New York state’s supplement.

Barbara Jones is a senior attorney and Disha Patel is an intern at AARP Foundation