Toward Understanding Homelessness: The 2007 National Symposium on Homelessness Research. Employment and Income Supports for Homeless People. Internal Revenue Service

03/01/2007

The Internal Revenue Service (IRS) has a very different mission from the other agencies: compliance with federal tax laws. One policy instrument contained in those laws, the Earned Income Tax Credit (EITC), is considered by many to be the countrys most important anti-poverty tool. Essentially, the EITC pays a family with children 40 cents for every dollar of earned income up to $11,000. This is an important source of income, and a powerful work incentive, to heads of families.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) provides a refundable tax credit to qualifying low-wage workers. Individuals or families who do not work are ineligible for the EITC. Many people with low earned income find that when they claim the credit they do receive money back from the federal government (National Law Center on Homelessness & Poverty, 1998). Single individuals are eligible for a very small EITC  up to $380. The bulk of the credits are received by households with at least one dependent child; households with two dependent children will receive a credit that may reach the maximum of $4,400, depending on the family income level.

The credit is calculated by reviewing a households annual income from work. It rises as work income grows from zero to approximately $11,000. The credit stays the same between $11,000 and $15,000. After $15,000 the credit gradually declines, until it is phased out at approximately $37,000.

There are two ways to apply for the EITC. Most commonly, a household will apply for the EITC as part of its annual federal tax return. If the household is found eligible for the EITC, the credit is applied to their tax liability, and any remaining amount is refunded to the household. It is also possible to apply for the EITC in advance. If a households earnings for the year are predictable and within the range of EITC eligibility, IRS forms can be filled out so that a portion of the EITC is included in a workers paycheck every two weeks. However, this can be tricky, as it requires workers to know their annual income at the beginning of the year. If the IRS determines that a household received advance EITC payments that it was not entitled to, those payments will be due on the next annual federal tax return.

EITC can be a strong work support for low-wage earners, including people who are homeless. EITC payments are not treated as income under federal programs such as public housing, the Housing Choice Voucher Program, Section 8 subsidies, TANF, food stamps, or Medicaid.

EITC refunds have allowed homeless persons to buy cars to provide reliable transportation to work, pay a security deposit and the first months rent on apartments, and pay off student loans to reduce monthly expenses (National Law Center on Homelessness & Poverty, 1998). One housing policy expert has recommended that policymakers consider expanding the EITC and other tax provisions that benefit low-income workers to improve the ability of those workers to afford housing (Stegman et al., 2003).

Approximately 75 to 86 percent of eligible workers claim the EITC each year. NLCHP estimates that this includes between 44,000 and 79,000 homeless workers. At the same time, several significant factors prevent additional eligible homeless workers from claiming the EITC. First, homeless workers are often unaware of the EITC; second, homeless workers are frequently unable to document some or all of their earned income; and third, many homeless workers do not have a mailing address or bank account at which to receive a tax refund check (National Law Center on Homelessness & Poverty, 1998).

Although a significant portion of eligible workers do claim the EITC, NLCHP found that many homeless persons were simply unaware of it. A number of homeless workers do not earn enough to owe taxes, but would still qualify for the EITC. However, their lack of knowledge of the program prevents many from filing tax returns. This problem could be remedied by additional outreach, both directly from the IRS and by ensuring that the IRS educates employers about the credit, so that those employers can encourage their employees to apply (National Law Center on Homelessness & Poverty, 1998).

Homeless workers can often have significant problems in documenting their annual income  a requirement for filing taxes, including filing for the EITC. This can be a problem for several reasons. First, homeless persons often move frequently during the year, as they cycle in and out of homelessness or from one shelter to another. As a result, they may have multiple addresses and multiple jobs. When this occurs, employers may not know where to send a W2 form at the end of the year. Or, a W2 form is received by a homeless person but the paperwork is lost or stolen before that person files his or her taxes in the following year. And, in many cases, homeless persons have day labor jobs or perform other short-term work, employment that may go unreported to the IRS. Consequently, these workers do not file tax returns. Agencies can and should work with consumers to help surmount these barriers. For example, a case manager could help a worker obtain a replacement W2 form, or might be able to persuade a recalcitrant employer to provide a W2 and report earned income to the IRS (National Law Center on Homelessness & Poverty, 1998).

Even though the IRS has ruled that workers do not need a mailing address in order to claim the EITC, lack of an address remains a barrier  particularly if a homeless person is reluctant to file for the EITC because he lacks an address where a refund check can be mailed or a bank account in which to deposit funds. To remedy this problem, homeless service providers can allow consumers to use the agency address as a mailing address. In addition, case managers should explore the availability of low- or no-cost bank accounts where consumers can deposit their EITC refund as well as any additional income (National Law Center on Homelessness & Poverty, 1998).

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