Refundable tax credits: Good for low-income families and the economy

2018-04-03T12:39:39+00:00 Blog Posts, Tax and Budget Blog|

by Kwaku Sraha
April 9, 2013

Tax day is right around the corner, but some low-income New Mexico families will not file a return because they do not owe any income tax or are not getting a refund for taxes that were withheld from their earnings. That can be a big mistake. Many such families may qualify for refundable tax credits. “Refundable” means that working families can file and receive the credit even if they earn too little to pay taxes and/or are not getting a refund for taxes that were withheld from their earnings.

Unfortunately, working families forego millions of dollars in unclaimed tax credits when they fail to file. This isn’t just bad for low-income working families who really need the assistance; it also means a lost opportunity to positively impact the economy.

The money from tax cuts and credits that go to low-income families are very likely to be spent—which is good for the economy.  Consumer demand creates jobs. That’s why some low-income tax credits were raised as part of the federal stimulus bill of 2009. Tax cuts for middle- or high-income families can also create jobs—if the money is spent. But families with higher earnings are more likely than low-income families to set the money aside in savings. Because people often spend their tax refunds where they live, these credits help boost the local economy. This is particularly good for New Mexico’s rural areas.

One of the best-known low-income refundable credits is the Earned Income Tax Credit (EITC). This federal program provides more than 27 million hard-working American families a refundable credit. It is considered one of the most effective anti-poverty initiatives, and it has always enjoyed bipartisan support. Eligible families may receive a refundable credit up to $5,891 for the 2012 tax year.

New Mexico has a state-level EITC, called the Working Families Tax Credit (WFTC). The state credit is worth 10 percent of the federal credit, is also refundable, and is available to most filers who qualify for the EITC. In 2011 alone, the WFTC returned almost $49 million to New Mexico’s low-income working families.

The Earned Income Tax Credit
In order to qualify for the federal EITC for tax year 2012, your adjusted gross income (AGI) must each be less than:

  • $45,060 ($50,270 married filing jointly) with three or more qualifying children: $5,891
  • $41,952 ($47,162 married filing jointly) with two qualifying children: $5,236
  • $36,920 ($42,130 married filing jointly) with one qualifying child: $3,169
  • $13,980 ($19,190 married filing jointly) with no qualifying children: $475

In additional to the WFTC, New Mexico has several tax provisions that help working families, including:

The Low-Income Comprehensive Tax Rebate

  • Filers whose AGI is $22,000 or less may claim this credit

The Low- and Middle-Income Tax Deduction
This personal income tax exemption for low- and middle-income taxpayers is available if your AGI is less than:

  • $36,667 for single persons
  • $55,000 for married persons filing jointly, surviving spouses, and heads of household
  • $27,500 for married persons filing separately

The deduction amount depends on income levels, but the maximum is $2,500 for each person claimed as an exemption.

The Child Day Care Credit
New Mexico parents who have AGIs of $30,160 or less may claim this credit (not to exceed $1,200) for child care expenses for dependent children when the child care enables the parent’s gainful employment.

Help with Filing Tax Returns
Among the reasons low-income families may not file tax returns are that they don’t know how and can’t afford to pay a professional to do it. Free assistance with filing federal and state tax returns is available for low- to moderate-income families and to the elderly through several programs:

CNM runs Tax Help New Mexico, which has sites across the state (http://www.cnm.edu/depts/taxhelp).

The IRS runs the Volunteer Income Tax Assistance (VITA) program in sites across the state (http://www.irs.gov/Individuals/EITC-Home-Page–It%E2%80%99s-easier-than-ever-to-find-out-if-you-qualify-for-EITC).

The state’s Taxation and Revenue website also offers several resources on how to claim these benefits (http://www.tax.newmexico.gov).

Kwaku Sraha is NM Voices for Children’s Business Manager.
Our federal work is funded by grants from First Focus and Voices for America’s Children.