California is expanding the reach of its tax credits, including creating a state-first $1,000 benefit for former foster children.
But the programs — designed to cut taxes owed to the government and put money in the pockets of those living in poverty — go untapped, leaving millions of dollars on the table each year.
The state budget signed by Gov. Gavin Newsom last month includes more than $100 million to expand tax credits for low-income Californians as research shows the optional benefits are among the best ways to help those in need.
But state officials are grappling with a conundrum: Not everyone who qualifies is likely to claim the loans, and those who need them most may not have to file taxes at all.
That’s partly because low-income earners don’t have to file taxes in California. The threshold requirement for single Californians without dependents is a gross annual income of $19,310.
A study released last year by the nonpartisan California Policy Lab found that nearly half of the households receiving CalFresh food benefits were eligible for, but did not receive, the state’s income tax credit, totaling $76 million in unclaimed credits .
“Tax returns are the most effective means of combating poverty in our country. It’s one of the fairest ways to get money out the door. But it may not be the most efficient way,” said Anna Johnson, associate director for housing and health at John Burton Advocates for Youth, a nonprofit for young adults who are in foster care or without a home. “We’re really trying to make it a fairer, more responsive structure. If we don’t provide enough incentives to overcome these barriers, they will keep getting in the way.”
Another hurdle is cost: Accountants can charge as much as $300, dampening the impact of potential loans.
“It really hurts people’s refunds. There isn’t enough support for low-income and non-income people to file their taxes,” said Sabrina De Santiago, policy and research director at Golden State Opportunity, an anti-poverty organization that runs CalEITC4me, a tool that helps people claim tax credits determine eligibility.
Advocacy groups have launched tax credit information campaigns and coordinated free tax prep and filing centers statewide since California created programs that reflect federal benefits beginning in 2015.
The entire universe of people who may be eligible for tax credits they don’t claim is unknown because the state lacks extensive data, according to the California Policy Lab.
Some of the state’s public relations efforts have proved inadequate. Over the course of two years, texts and letters reached more than 1 million eligible Californians urging them to claim the credits, but none of the efforts “had a demonstrable impact” on tax returns or Earned Income Tax Credit claims, it said a report by the California Policy Lab in 2020.
Instead, proponents say, the focus should be on affordable, community-based tax aid. Applying for a tax credit has a multiplying effect, they said, and can open applicants to other benefits they didn’t know they were entitled to and streamline processes for other government programs.
A pilot project launched last year in Santa Clara County reported that it helped 45 young adults involved in foster care with their taxes, raising more than $135,000 in total in revenue. According to a report by John Burton Advocates for Youth, the project increased annual earnings by an average of 17% for first-time applicants and 42% for parents.
“We’re trying to find ways to make it as easy as possible for people to file their taxes,” De Santiago said. “It’s really important because a tax refund is often one of the biggest lump sums they get in a year and can be used to fix a car or pay for tuition – all those things that are harder to save for .”
According to the state Treasury Department, 4.3 million taxpayers received the California Earned Income Tax Credit in 2020, the latest available data, up from 3.9 million in 2019. The number of California taxpayers who received the Young Children’s Tax Credit, declined to 420,000 in 2020 from 430,000 in 2019.
These loans are for Californians who earn less than $30,000 a year and have children under the age of 6.
California’s newest tax credit, which will give $1,000 to former foster youth ages 18 to 25, will benefit an estimated 20,000 residents beginning in the 2022 tax year.
Former foster children in particular could be at risk of missing out on a tax credit, said Jane Schroeder, chief policy officer for advocacy group First Place for Youth.
Many foster children have spent most of their lives in institutional or nontraditional settings and enter adulthood without financial literacy and other life skills, she said.
“We have young people who come into our program at 18 and have never been to a grocery store before,” Schroeder said.
Jesse Rothstein, a UC Berkeley professor who has done research on tax credits for the California Policy Lab, said the issue is challenging the overall effectiveness of the nation’s tax system.
“I think if we’re serious about using the tax system repeatedly to try and distribute aid, we should work hard to create simpler processes for people,” he said. “I think a lot of people don’t realize how complicated our social safety net system is and how hard it is to qualify and find out if you qualify. It can be a full-time job just managing everything.”
https://www.latimes.com/california/story/2022-07-20/california-problems-claiming-tax-credits-foster-kids Many not claiming California tax credits for foster youth