Suburban residents leave $300 million in tax credits unclaimed

Low-earning workers in Chicago and six suburban counties left an estimated $300 million in federal tax breaks on the table last year, and the Internal Revenue Service expects similar results this year.

Although the deadline to file personal income tax returns for 2011 was Tuesday, the good news is workers can claim up to three years of these missed tax breaks by filing a 1040X form, available online or at local revenue department offices.

Earned Income Tax Credits are often touted by economists and politicians as one of the most successful and important anti-poverty government programs of the past century. Research has indicated the tax breaks have a greater impact on reducing the nation's poverty rate than any other government-operated financial assistance program, and claiming the benefit does not impede anyone's ability to qualify for other assistance programs.

However, IRS officials believe about 20 percent of American workers eligible for the tax breaks aren't claiming them on their tax returns. And since eligible workers need to claim them on their federal returns to receive similar breaks on their state tax returns, that means 20 percent of Illinois workers aren't receiving the state tax break, either.

Last year, workers in Cook, DuPage, Kane, Lake, McHenry and Will counties combined to file 3,435,442 federal income tax returns with 646,460 claiming the tax breaks to the tune of $1.5 billion. Estimates from the federal government indicate nearly 130,000 other suburban workers or working families missed out of the breaks.

Cook County taxpayers who claimed the benefit averaged a tax break of $2,391. McHenry County taxpayers averaged the lowest break among the suburbs at $1,885. DuPage, Kane, Lake and Will county taxpayers averaged credits of $1,942, $2,268, $2,156 and $2,212 respectively, according to the IRS.

“It seems like the IRS is doing the most they can do to promote this,” said Bruce Meyer, a University of Chicago economics professor who has written several papers on the tax credit program. “But one of the problems is that they've made the process ridiculously complicated. The instruction booklet just for the Earned Income Tax Credit is 68 pages.”

IRS officials have stepped up efforts to market the tax breaks in recent years and host tax-season assistance centers throughout the country catered to low- and moderate-earning workers.

“It is still a complicated credit, but there's lots of help available to you for free,” said Michael Devine, an IRS spokesman based in St. Louis. “And all the electronic filing programs will walk you through the process.”

To qualify, workers must earn below various thresholds and the benefits increase based on the number of children in a household. The maximum federal benefit this year is $5,751 for a household with three or more children. The household earnings cannot exceed $49,078 for a married couple or $43,998 for a single parent.

The benefit can be used in many ways. It may cover some or all of a worker's income tax burden, or it can supplement or even create a refund for them as well.

University of Chicago economics professor Saurabh Bhargava has studied why some of these financial benefits go unclaimed. He said earned income credits have a higher participation rate than other economic assistance programs, like Medicaid and food stamps. Yet, a hefty portion of those eligible are not taking part.

“We believe about 65 percent of those not claiming this benefit are not filing taxes at all,” he said. “If you don't file taxes, you can't claim the benefit.”

In many cases, the lowest-earning American workers don't have to file tax returns. However, by not doing so, they are often missing out on tax refunds that would be created by claiming the tax breaks, Bhargava said.

Workers who have no children and earned less than $13,660 last year are eligible for a credit of up to $464, according to the IRS. There's less of a stigma attached to the tax breaks than other government-run financial assistance programs, which may contribute to its overall popularity, but that doesn't explain why millions of eligible workers still ignore it.

“Why individuals would leave money on the table — and the (tax credits) specifically — is a bit of a mystery and we don't have a clear explanation,” Bhargava said. “Some are deterred by the general complexity of the tax system as a whole.”

But they might also be scared away from the benefits, Bhargava suggested.

The audit rate for those claiming the benefit is almost 2 percent and accounts for roughly 48 percent of all IRS audits, Bhargava said. That's despite the fact that those claiming the benefit contribute only 3 percent to 4 percent of the nation's income tax base. Comparatively, the IRS audits 1.1 percent of returns that don't claim Earned Income Tax Credit benefits, he said.

Meanwhile, Illinois workers who do take advantage of these benefits are receiving smaller breaks in their state taxes than workers in neighboring states. While Illinois is just one of 22 states and the District of Columbia that allow state tax credits for low-earning workers, the state's rate is among the lowest of the group at 5 percent of the federal benefit.

That means if a household received the maximum federal credit of $5,751, the state credit would amount to $287.55. The rate is 7 percent in Iowa, 9 percent in Indiana, and between 4 percent and 43 percent in Wisconsin depending on the number of children residing in the household.

Illinois Department of Revenue spokeswoman Sue Hofer said the rate will jump to 7.5 percent next year and 10 percent in 2015 because of legislation signed by Gov. Pat Quinn in January.

“It's expected to provide $105 million extra a year to low-income families,” she said.

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