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Paying the Price?

Low-Income Parents and the Use of Paid Tax Preparers

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Document date: February 01, 2005
Released online: February 01, 2005

No. B-64 in Series, "New Federalism: National Survey of America's Families"

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).


The Earned Income Tax Credit (EITC), which is administered through the federal income tax system, is the largest cash assistance program for low-income families.1 The EITC provides up to $4,200 a year for working families with two or more children—less for families with fewer children. The refundable EITC first offsets taxes owed and then provides additional income to families through a tax refund.2 In 2002, the EITC lifted around 4.9 million people out of poverty (Llobrera and Zahradnik 2004).

Policymakers designed the EITC to encourage work by subsidizing people's wages. Indeed, some research suggests that this goal has been met among single mothers (Eissa and Hoynes 1998; Meyer and Rosenbaum 1999). For the EITC to meet this goal, however, eligible people must know about the credit.

Among low-income parents, Ross Phillips (2001) found marked inequities in who knew about the EITC among various racial groups. Only 32 percent of lowincome Hispanic parents knew about the EITC in 1998, many fewer than their peers of other races and ethnicities. This variation in awareness raises questions about how low-income families, many of whom are not required to file a tax return, learn about the credit. One avenue might be through a caseworker at a welfare office. However, only a small share of low-income parents interacts with a welfare office. Another avenue could be through filing a tax return either individually or with the help of a paid preparer.

Many low-income families need assistance preparing their tax returns. Data from the IRS indicate that almost all filers who receive assistance receive it from a paid preparer, including 98 percent of families with incomes below $30,000.3 This fact raises important policy concerns. First, mere use of a paid preparer and secondary services such as refund anticipation loans4 erode the value of credits such as the EITC for low-income families (Berube et al. 2002). Second, while use of a preparer could enhance knowledge of such key tax provisions as the EITC, it could also reduce knowledge if the preparer doesn't share information or the client doesn't ask—limiting the credit's effectiveness at creating incentives to work. On the other hand, low-income families that use a paid preparer may reap benefits because professional preparers should know more about the tax benefits available to their clients. However, some apparently eligible families that use paid preparers do not claim the EITC (GAO 2003).

This brief uses the 2002 National Survey of America's Families to document the use of paid preparers by low-income parents, broken down by race and education level. It also examines the relationship between using a paid preparer and whether a parent knows about and receives the EITC.

Low-income parents are more likely than other parents to rely on outside help to prepare their return. This help may come with significant costs that offset tax assistance targeted at low-income families. However, low-income parents who know about the EITC and receive help are more likely to receive the EITC than their peers who prepare their returns independently.

Notes from this section:

1. Preliminary estimates of the 2002 nonadministrative costs of the EITC total $38.7 billion (IRS 2004); combined state and federal spending on cash assistance in Temporary Assistance for Needy Families (TANF) totaled $14.6 billion (HHS 2002).

2. Some tax credits are nonrefundable and can only be used to offset taxes owed. These credits are of limited value to low-income families, who likely owe little or no personal income tax.

3. Tabulations from the 1999 Statistics of Income file.

4. Refund anticipation loans allow families to receive their anticipated EITC very quickly. These loans are often subject to high interest costs.


Note: This report is available in its entirety in the Portable Document Format (PDF).



Topics/Tags: | Economy/Taxes | Families and Parenting | Poverty, Assets and Safety Net


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