25% of city residents get earned-income tax credit

But many spend it on fees for loans, preparing return

January 14, 2003|By Kate Shatzkin | Kate Shatzkin,SUN STAFF

The federal earned-income tax credit pumped $125 million back into the pockets of Baltimore's low-wage workers in 2000, but millions of those dollars are being spent on commercial preparers who charge high fees for loans on tax refunds, a new report says.

Advocates for the poor point to the Brookings Institution report, released yesterday, as evidence that many low-income workers don't know they can have their taxes done free. As tax season begins, they are stepping up efforts to expand free preparation sites, while encouraging filers to establish bank accounts into which refunds can be directly deposited - and received much faster than through the mail.

The study, which examined tax data in Baltimore and 26 other cities and rural areas around the country, found that more than a quarter of Baltimore workers who filed returns in 2000 received the credit - most of them concentrated in East and West Baltimore.

The Baltimore-based Annie E. Casey Foundation has launched a national campaign to help more people receive the credit and use it to build savings that could boost them out of poverty.

"We see it as a critical tool for the larger set of questions about how do you help a set of working families to become financially more stable," said Douglas W. Nelson, president of the foundation. Tax refund time, he said, is "one of the few times they have a pot of money in their hands to make some choices about."

The earned-income credit, available since 1975, has become one of the nation's largest anti-poverty programs as Congress emphasizes work over welfare. Generally geared to working families, the credit cuts taxes for filers with incomes from below the federal poverty line to nearly double that amount - up to $34,000 for a married couple with two children. And it refunds money to many eligible filers who owe no taxes.

The credit returned $31 billion to low-wage workers across the country in 2000 - as much as welfare and food stamps combined, the report found. Still, national studies estimate that as many as 15 percent of workers who qualify for the credit may not receive it, either because they don't know about it or aren't filing tax returns.

At the same time, the number of low-income filers who use paid preparers is growing, the report showed, from 62 percent of those who claimed the credit in 1997 to 68 percent in 1999.

Many of those filers are paying for loans to get their refunds right away - a practice that ate up about $2 billion of the $30 billion the credit returned to workers in 1999, said Alan Berube, a Brookings senior research analyst and author of the report. For the loan of a $2,000 refund, a filer could pay $100 or more in fees, in addition to paying for tax preparation - which could cost another $100 or more, depending on its complexity.

Figures from the previous year show that more than half the people who get refunds from the credit in Baltimore are spending a sizable portion on loans to get the money right away - even though they could have taxes prepared for free. The report did not detail how much money was spent on those loans.

The state-funded Maryland EIC campaign has been trying to get the word out about the credit and free tax preparation for more than a decade. Although criteria vary from site to site, taxpayers who qualify for the earned-income credit can generally qualify for free preparation, including free electronic filing to get quick refunds.

But campaign coordinator Jennifer Williams said the study shows many people who qualify still elect to pay for tax preparation.

"Statewide, our [free preparation] coverage is not what we'd like it to be," Williams said. "People maybe don't know about it. And I think habit's probably a strong motivator."

The Internal Revenue Service has sponsored training of volunteer preparers around the state for years.

The Baltimore CASH campaign, a citywide outreach initiative supported by Casey, has been recruiting volunteers for additional sites, bringing to 35 the number of places in the city that will prepare taxes free to those who qualify. A list can be obtained by calling 410-685-0525.

William Matthews, a 27-year-old administrative assistant who lives near Dunbar High School in East Baltimore, was one of those who didn't know about free tax preparation until a year ago, when a friend told him about a volunteer preparation site.

Before that, he and his wife typically paid $170 to $200 - about 5 percent of their usual refund - to have their taxes done. The family decided not to get a loan on its refunds "because it was so much more money," he said.

Now Matthews, a father of two, is telling everyone he knows about the free preparation.

At the Jackson Hewitt tax-preparation office in the Westside Shopping Center - in the middle of the 21223 zip code, where many filers both receive the credit and buy loans - red signs shout: "Get a Money Now! Loan" and "We Loan on EIC!?"

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