Personal Finance

Many Americans are eligible for more generous tax credits this year. They will have to file a return in order to get the money

Key Points
  • Many individuals and families are eligible for more generous tax credits this year.
  • But those who typically do not file tax returns may be shut out.
  • Research finds free filing programs may be the answer to ensuring those who are eligible receive the money due them.
The IRS and state tax agencies have programs to help taxpayers prepare returns. Here, Robert Smith from the New York State Department of Taxation and Finance assists Geraldine Gruenthal, of Levittown, New York, at a free tax preparation session in Bellmore, New York on April 1, 2017.
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This tax season could help give many individuals and families access to more generous tax credits, thanks to temporary changes put in place through the American Rescue Plan.

The catch is you have to file a tax return. That may be a challenge for individuals who do not typically file.

Research New York University conducted in coordination with the IRS finds that promoting free tax-preparation services can help increase filing rates, which can also lead to more new filers claiming benefits such as the earned income tax credit or child tax credit.

"It seems so simple that if a benefit is administered through the tax need to file, but that's a critical barrier," said Tatiana Homonoff, associate professor at New York University's Robert F. Wagner Graduate School of Public Service, and a co-author of the research.

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"If we remove some of those barriers, we will almost automatically be increasing take up of these credits," Homonoff said.

About 70% of U.S. households are eligible for free tax-preparation services, yet only about 3% actually take advantage of them.

The research, which was conducted in 2019, included sending 55,000 IRS letters to non-filers touting free tax services, such as the government's in-person Volunteer Income Tax Assistance (VITA) program or those offered through software from companies like H&R Block or TurboTax.

Of those who received the letters in the experiment, 22% filed their taxes compared to a 21% filing rate for those who did not receive any communications. The one percentage point increase contributed to a 4% increase in the proportion of people who filed a return.

Tax season is here and these are trends Intuit CEO Goodarzi is seeing
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Consequently, individuals and families were more likely to claim any earned income or child tax credit funds for which they were eligible. Those who filed after receiving a letter received an average of $861 in earned income tax credit benefits and $976 in child tax credit benefits.

Enhanced tax credits for 2021

There is much more money on the table through those tax benefits and others this tax season.

The 2021 earned income tax credit for workers without dependents has been increased to $1,502, up from $538 in 2020. The credit is now available to eligible workers who are at least 19 years old, or 18 years old if they are homeless, and those ages 65 and up. It is available to filers with adjusted gross incomes below $21,430 if single and childless in 2021, or $27,830 if they have no dependents and are married and file jointly.

The child tax credit has also been increased for the 2021 tax year to $3,600 per child ages 5 and under, and $3,000 per child ages 6 through 17, up from $2,000 per child. Parents must fall under certain income thresholds in order to receive the full credit — $150,000 if married and filing jointly, $112,500 for heads of household and $75,000 for singles.

It's a very low-cost intervention. The benefits are huge for the individuals who do file and do end up claiming.
Tatiana Homonoff
associate professor at New York University's Robert F. Wagner Graduate School of Public Service

Additionally, people who are eligible but missed out on the third stimulus checks may also claim those funds through the recovery rebate credit. Those one-time payments were up to $1,400 per person.

In addition, the child and dependent care tax credit was also made more generous for 2021. Those who are eligible can claim up to $8,000 in expenses for one child or dependent, up from $3,000 in previous years, or up to $16,000 for two or more dependents, up from $6,000.

Still, estimates indicate individuals and families who typically do not file returns are at risk of missing out on these tax benefits.

'Low cost intervention'

About 22% of all eligible taxpayers didn't claim the earned income tax credit in 2018, according to the IRS.

Moreover, when the monthly expanded child tax credit payments began in July 2021, the Center on Budget and Policy Priorities estimated that approximately 4 million or more children in low-income families were at risk of not receiving the money.

While the IRS established a non-filer portal for those families to submit their information in order to access the money, it is unclear how many were able to do so by the end of 2021, according to the Center on Budget and Policy Priorities.

NYU's research found that for every dollar spent by the IRS to promote free tax-preparation services, an additional $15 in tax credits were claimed.

"It's a very low-cost intervention," Homonoff said. "The benefits are huge for the individuals who do file and do end up claiming."

The IRS offers free basic tax return preparation services to qualifying individuals through its VITA and Tax Counseling for the Elderly (TCE) programs.

The VITA program is generally available to people who earn $58,000 per year or less, while the TCE program is for individuals who are 60 and over.

To find out if you qualify for these services, or to find a VITA or TCE site near you, visit the IRS website.