[As Congress embarks on its annual task of refining the federal tax code, our free tax campaign director and asset-building guru Courtney Noble discusses the importance of temporarily expanded tax credits in providing the working poor with a solid financial footing, and argues for making those expansions permanent.]

Between January and April, 2010, United Way of King County volunteers prepared tax returns for 14,000 clients throughout King County.  Our clients had a median annual income of $19,062, which, when compared to Seattle’s median household income of $85,828, reveals the challenges many of these taxpayers faced to make ends meet.  Moreover, the median income of our 2010 clients was $465 less than that of our 2009 clients, and 12% of clients were receiving unemployment compensation, up from 8% in 2009.  These taxpayers represent some of the individuals hardest hit by the recession: the newly unemployed, the working poor and those attempting to get by on a patchwork of minimum wage jobs.

Fortunately, several new provisions to the tax code introduced by Congress as part of last year’s Recovery Act allowed our tax clients to receive larger refunds this year than in previous tax years.  The average tax refund for our clients in 2010 was $1,981, an increase of $282 over 2009’s average refund of $1,699.  Tax refunds are, for many of our clients, the largest single infusion of cash they receive all year, and a larger refund can make a real impact on a household budget of $19,000.  The increased refund size for our 2010 tax clients stemmed primarily from 3 significant tax code changes, which President Obama is proposing to make permanent in his 2011 budget.

Supporting Children: Child Tax Credit

The CTC allows low- and moderate-income families to cover some of the added costs of raising children while encouraging parents to work.  Prior to tax year 2009, the CTC was refundable only to families earning more than $13,000.  For 2009, the Recovery Act made families eligible once they earned $3,000, with the size of the credit growing with the family’s earnings.  If Congress does not make this improvement permanent, the poorest families will lose access to the full credit; for example, a parent working for the minimum wage and raising two kids in Washington would see her credit cut from $2,000 to less than $650.  The extension of the credit is a cost effective way to prevent already poor children from falling into deeper poverty, thereby circumventing significant long term costs to our community as a whole.

Encouraging Work: Earned Income Tax Credit

The EITC is a federal tax credit for low- and moderate-income working people designed to encourage and reward work.  Prior to tax year 2009, families with three or more children received the same EITC benefits as those with two children, in spite of larger families’ higher living expenses.  The change introduced in the Recovery Act responded both to the increased costs of raising more children and to the greater likelihood of poverty in larger families.  For United Way of King County’s tax clients, the average EITC grew from $1,452 in 2009 to $1,630 in 2010, and the overall total of EITC dollars returned to the community through our program increased from $5.2 million in 2009 to $6.3 million in 2010.  Making the improvements to the EITC permanent will mean not only distributing funds to larger families who live on the precipice of poverty, but increasing the federal dollars to be spent and circulated in our community.

Promoting Education: American Opportunity Tax Credit

The Recovery Act also revised the Hope Education Credit, renaming it the American Opportunity Tax Credit, and rendering it available to millions of low- and moderate-income students for the first time. The changes raised the maximum value of the credit from $1,800 to $2,500, made the first $1,000 of the credit refundable and allowed students to claim the credit for four years of education instead of two.  Before this improvement, married couples earning less than $26,000 with one child in college and another younger child would be ineligible for the credit.  In this time of high unemployment, it makes sense for members of our community to upgrade their skills and prepare for jobs with career potential. Most federal tax assistance for college study is primarily helpful to households with incomes of $100,000 – $200,000. This credit supports higher education for students for whom it could otherwise be unaffordable

Making these improvements to the tax code permanent will help low-income working families in King County withstand the loss of income from the recession, prevent millions from slipping into poverty, and sustain economic growth, now and for years to come.  In 2010, the United Way’s 600 volunteer tax preparers saw these credits help parents whose earnings had dropped in the recession, and help children, families and the economy by preventing disastrous reductions in purchases of food and other necessities. Extending these credits will provide significant help to families living on the poverty line, easing their daily struggle to make ends meet.