The EITC: Helping to keep people working
Paula from Traverse City
A 12-year-old Ford Taurus is Paula Fekken’s lifeline. She uses it to get to her job running the mailroom at the Interlochen Center for the Arts, eight miles from her Traverse City home. She also uses it to transport her four boys – ages 8, 11, 15 and 16 – to numerous school activities.
She wants her tax returns to go toward needed repairs on the road-weary Taurus, but an $825 tax increase from the state of Michigan may push that goal out of reach.
“Pretty much all of my money goes to clothing and shoes and basic needs,’’ said Fekken, 42, and newly divorced.
Like many lower-income workers, Fekken is feeling the sticker shock from tax changes made in 2011. That’s when the majority in the Legislature and Gov. Rick Snyder increased taxes on individuals by 23% and cut business taxes by 83%. The big tax shift is just now being felt by working families and seniors as tax returns come in.
A major piece of the tax shift came from chopping the state EITC from 20% of the federal EITC to just 6%. The EITC is a credit for lower-income workers. It is designed to reward work and offset other taxes that cause low-income people to pay a bigger share of their income in taxes such as payroll taxes, sales tax and property taxes.
The Michigan EITC dropped from an average of $439 to $132. For big families, the impact is even greater. Fekken earned just over $26,000. Her state EITC this year is $353 – down from $1,178. That’s a big loss to absorb for families struggling to make ends meet.
Fekken said she is lucky that her job pays more than minimum wage. At $10.50 an hour, it’s a lot more than many people she knows. She also receives child support from her ex-husband, though not always the full amount.
Still, she says she has to be careful with every dollar and the reduced EITC will be felt.
“Most of my money goes to food. With the four boys — every little bit helps,’’ she said.
Paula’s story was written by Judy Putnam for the Michigan League for Public Policy‘s Blog, Factually Speaking.
Liz from Saginaw
“Thank you, thank you, thank you.” That is what Liz had to say to the volunteers at the volunteer income tax assistance site run by the United Way for Saginaw County. Working as a customer service representative, she doesn’t make a whole lot of money or have complicated taxes.
“I own a home, but nothing special,” she said, but that didn’t stop the “big box” tax preparer she used last year from telling her it would cost $400 to do her taxes this year. The $250 increase from the $150 she paid in 2014 was more than she could pay. When she asked about the price hike, she was told that they “charge per form, not per return.”
“I have a little deal where I have a 1099 this year,” she said. “That still seems way ridiculous to me just for one extra form…. I couldn’t afford it. This money I get back I use to pay my property taxes and I really need that because working minimum wage, I can’t hardly save enough to pay my property taxes.”
The free tax program not only saves her money on tax preparation fees, but also ensures that she gets all the credits for which she is legally eligible including Michigan’s Homestead Property Tax Credit and Home Heating Credit.
“I have my home and all my bills and the (heating) bill absolutely killed me (this winter),” she said. “I actually had to borrow money from family to help me pay my gas bill. They shut me off last year because I got behind.” She is hoping that this year, with the help of the Home Heating Credit, which is used to offset the cost of heating for seniors and lower-income households, will help her avoid a similar situation, again.
Liz’s story was written for the Community Economic Development Association of Michigan (CEDAM) Financial Empowerment Blog.
David from Muskegon
The last few years had not been easy for David. The skilled machinist from Muskegon had been laid off for two years and was having trouble finding steady employment. Fortunately in 2011 he was able to get part-time temporary work as a fabricator and by the end of the year, he was hired as a regular, full-time employee at a small Muskegon machine shop.
When it came time to file his taxes though, David figured it might not be worth the effort. Since he had only earned about $8,000 between his two jobs, he figured any refund would just go to cover the cost that a paid preparer would charge.
He was wrong.
After receiving a pamphlet from his girlfriend about the Volunteer Income Tax Assistance (VITA) program at the Goodwill Workforce Development Center in Norton Shores, he learned that he could have an IRS trained tax preparer file his income taxes for free. David figured he would give it a try.
Even though David’s total income for 2011 was not much, he had paid both payroll and income taxes on top the Michigan sales taxes. After looking at all of his documents, David’s VITA volunteer preparer site determined that he was eligible for an Earned Income Credit and federal and state refunds of almost $1,400!
“This is a godsend,” said David. “I’m glad I came here this year. This helps me tremendously.”
David put his refund to good use by replacing his costly and not always reliable pickup truck. Since the cost of filling up the truck up with gas was a regular strain on his household budget, said he would use the EITC and money he saved in tax preparation fees and make sure he had a more reliable vehicle to get to work.
“This is so great for people,” David said. “I would be disappointed if it wasn’t here.”
Velma from Adrian
Velma used to go to a paid preparer to file her taxes. She did it because that is the way she and her husband would file their taxes before he passed away. It only cost $92, not a lot considering all the forms that were used and the seemingly endless numbers that needed to be entered. Besides, her return always was about $98 or $99 dollars – more than enough to cover the fee with a couple of dollars left to spare. Then someone told her about the free tax services offered by Community Action in Adrian. She figured it would give it a try. That was four years ago. She has come back every year since and even brings along her friend so he can save money too.
“It’s great,” she said. “They ask questions about rent and heating costs that the other guy never asked. Now, instead of paying $92 so I could receive a return of $98, I get about $400 back and I don’t have to pay!”
Velma’s story is not unique. Unlike some paid income tax preparers, every volunteer tax preparer at the Community Action’s free tax site is certified by the IRS and trained to know about all the federal and Michigan credits for which people may be eligible. That is why Velma’s tax refund went up – she was getting the Michigan Property Tax Credit, something her other preparer had missed.
Velma’s story was written for the Community Economic Development Association of Michigan (CEDAM) Financial Empowerment Blog.
Kelly from Saginaw
“We’ve never needed a program like this in the past but after quite a few years of bad luck, having this help means the world to our family. The tax preparer was so knowledgeable and helpful. He really made the process easy and his friendliness helped put us at ease. We can use the money we saved from paying a preparer to help us get back on our feet. I would definitely recommend this service to others and wish more people knew about it.
“The EITC is a huge help, especially for working families that are still struggling. My wife and I try to do the best we can with what we have but getting that EITC credit and saving what we would have paid will help us get back on our feet and allow us to purchase a second vehicle for our family.
“I would like to thank the volunteers that give their time to make this program possible. EITC and free tax services help working people like my wife and I, do the right thing, have our taxes prepared and then allow us.”
Wanda from Muskegon
Wanda works the late shift as a machinist. Her husband is disabled. Last year, Wanda and her husband had three grandchildren living with them in their home in Muskegon, Michigan. They provided all the support for the three grandchildren.
Wanda had never been to a VITA site. She had always used a paid preparer. She had heard about the free tax preparation services from friends. She liked the idea of saving a few hundred dollars in tax preparation fees and thought she would at least give VITA tax preparation a try.
A VITA tax preparer reviewed Wanda’s intake form and noted the three grandchildren and her marital status. After some questioning and probing, the tax preparer determined that Wanda could be eligible for the Earned Income Credit. To claim the credit, the couple would need to file as “Married Filing Jointly,” and the tax preparer would need a Social Security card for the spouse. Wanda did not have the card with her because she thought she should file as “Married Filing Separately.” She thought this was the best filing status because her husband owed a debt, and she was afraid any refund she was entitled to would be taken to pay off his obligation.
After looking over Wanda’s income documents, the preparer determined that Wanda was probably eligible for an EIC of just over $5,000.The tax preparer explained why the couple should file jointly to claim the EIC, and the process of claiming “Injured Spouse” to ensure Wanda would receive the credit she earned. Wanda agreed to return to the VITA site with the necessary documents to include her husband on the return as “Married Filing Jointly.”
Wanda’s tax return was completed the next day by the Financial Stability Coordinator for Goodwill Industries of West Michigan, who is also a certified VITA tax preparer. With EIC, the Additional Child Tax Credit, and the Michigan credits, the expected refunds totaled almost $10,000. The Coordinator learned that Wanda did not have a bank account. Wanda avoided using banks because she thought an account would be garnished for her husband’s debt. The Coordinator explained a refund debit card option that was offered at the site – and that it would be a way for Wanda to receive her refunds quickly and securely. Wanda also agreed that the card was a good option in terms of avoiding check cashing fees.
The Goodwill Prosperity Center Manager did a quality review of the return. During this process, she and the Financial Stability Coordinator opened a conversation with Donna about what she might do with her refunds. They shared with her some ideas on using the refund for current and future needs. They sketched out a plan for her that included putting aside some of the money in an emergency fund, purchasing savings bonds for the three grandchildren, paying off some layaway balances, and spending some of the money on bedroom furniture for the children. They also referred her to a local nonprofit credit counseling agency to see if she could get some assistance in managing other debt problems. Wanda was very receptive to the ideas offered, and expressed appreciation for the time and assistance she was given.
Before leaving the site, Wanda said, “You know I went to (paid tax preparation franchise.) I’m not going back to them. First, they charged too much. You people aren’t doing this for money. You did this because you cared about me. I wasn’t just another tax return to you. You wanted what was best for me.”
Shannan from Fowlerville
Shannan Mills does a lot of juggling. With three daughters and three jobs, the 34-year-old divorced mom from Fowlerville is on the move constantly trying to make sure her daughters’ needs are met.
She said she was surprised and disappointed when she received only $100 from the Michigan Earned Income Tax Credit this year.
In 2011, Gov. Rick Snyder and a majority of lawmakers voted to cut the EITC from 20% of the similarly named federal credit to just 6% to pay for a dramatic drop in the state’s corporate income tax.
The big tax shift from businesses to individuals is just hitting home now as taxes are filed for the 2012 tax year.
Under the reduced EITC, Mills saw her credit drop from about $330 to $100.
“I was really shocked it was cut so much,’’ Mills said.
Mills has a house cleaning business, does lunchroom duty at elementary, middle and high schools, and works part-time at a retail store specializing in luxury bath items. In all, she earns about $26,000 a year.
She and her daughters, ages 10, 13 and 14, recently moved from her parents’ home into a fixer-upper that she rehabbed herself with the help of friends. She said the EITC is an important tool to keep up with basic needs of her family.
“I didn’t think that was wise for them to do that,’’ she said about the cut in the state EITC. “People really need that money. For us each year, it’s catching up on past bills.’’
Under a proposal announced by House Democrats earlier this year, the EITC would be raised to 11% of the federal credit. That’s a step in the right direction for Mills and other families around the state.
Rob Burgess is a retired CPA and Lakeshore Public Schools administrator. He runs the Volunteer Income Tax Assistance site in Benton Harbor. He said many of the clients seeking free tax assistance make between $16,000 to $20,000.
Those with children have been dramatically impacted by the reduced state EITC, losing about $200 per family.
“We’ve done everything we can to make sure their taxes are calculated correctly. We’ve had some instances where they’ve become quite emotional,’’ Burgess said while taking a break from helping clients this week. “Two hundred bucks is a lot of money.’’
Burgess said a frequent use of the tax refund for his clients is to pay property tax bills and to catch up on overdue utility bills.
Shannan’s story was written by Judy Putnam for the Michigan League for Public Policy‘s Blog, Factually Speaking.