Tax time is here again. Many people have already filed and already received a refund. A large number have filed and wonder where their refund is. The short answer is... delayed. The IRS put out the word that they wanted everybody to e-file. Mostly, folks did. The computers promptly crashed and the IRS is still digging out.
Refunds go to people who paid too much in taxes, or to people who are due what is called a refundable credit, a credit that exceeds the tax paid in. The major refundable credit is the Earned Income Tax Credit. It is not widely recognized that Aid to Families with Dependent Children (that would be what used to be called welfare) morphed into the EITC. The purpose of the EITC is to deliver a big chunk of change to working adults with children. A big criticism of AFDC was that it encouraged people not to work, and it encouraged the breakup of families because the mommas couldn't get AFDC if poppa was still around. Hence we had welfare case officers running around prying into people's lives.
Now we have tax preparers, at the risk of hefty fines and license revocation, prying into people's lives. The eligibility criteria for the EITC are quite specific and there is a detailed interview.
The refundable credits can pump a considerable chunk of change into a low income family all at once. I don't know if that's a good way to deliver a subsidy to the most vulnerable families or not. Listening to people's stories is frequently heart breaking. Just how does a mother of three small children get by making $11,000 a year? Sure, she is eligible for food stamps, and sure, she can get subsidized day care if she can find any, but clearly this lady is busting her tail working at a low paying job and trying to keep it together. Then she gets a $9,000 tax refund and that about doubles her annual income, but she doesn't have a bank account to put it in.
Washington is one of the more enlightened states at tax time. State income tax sounds like a less regressive idea than our notorious Business and Occupation Tax, until encounters with numerous state tax forms reveal just how rigged most of them are.
Jack and Jill are unmarried and living together with Jack's son, Jill's daughter and their baby. Jack has a job carrying water and Jill stays home with all the children and has no other income. Jack can claim Jill and her daughter as dependents. We are progressive in these parts. There are 16 states where this domestic arrangement violates local laws against cohabitation or fornication and the non-working partner cannot be claimed as a dependent.
Suzie and Sallie live with Suzie's daughter and Sallie's Chihuahua. Suzie supports the household with her job and Sallie makes $2000 a year selling crocheted hats. If they lived together all year, Suzie can claim Sallie as dependent. It doesn't matter whether they are a couple or just housemates. The Chihuahua doesn't count.
If Suzie and Sallie become registered domestic partners, their tax status changes. It always does when you tie the knot. Then they encounter a curious instance of bureaucratic schizophrenia. The federal government does not recognize the relationship. Washington State not only recognizes it, Washington is a community property state. The solution is to split the income of both partners and have both file as single with half the joint income and half the tax liability. This complicates filing, takes longer, and cannot be filed electronically. However, it also generally reduces the couple's taxes. If one partner makes considerably more than the other one, it can significantly reduce their taxes by bumping both into a moderate income bracket.
In another case of bureaucratic schizophrenia, tax status has nothing to do with immigration status. Maria is an undocumented worker. Maria is required to pay taxes on her income and is eligible for some tax credits. Non-social security card holders are required to obtain an Interim Tax Identification Number to file. This connects Maria with the social security taxes that she paid. She is credited with what she paid into the system at such time as her legal status is resolved.
The easiest way to end up with a balance due at tax time is to work several part time jobs and not have enough withheld. If taxes are withheld for each job as if there is no other income, it's easy to come up owing. It also happens with married couples when one makes pretty good money and the other has a part time job with low or no withholding.
The next easiest way to owe taxes is to have a small business and not pay quarterly estimated taxes. The federal government frowns on this. People do it all the time anyway, despite the potential for fines. The self-employed are responsible for paying the employer's portion of the social security and medicare taxes. This can be scary. I figure that between operating costs and taxes, I have to make two dollars to keep one.
A sizable number of self-employed people panic, do business in cash and don't file at all. This is not a good idea. For one thing, operating completely in the informal economy for years means not paying into the social security system and not establishing a track record in the formal economy. After years in the shadow economy, Joe Plumber wanted to buy a piece of land and was sobered by the realization that he had no documentation for his financial position. My deceased uncle was proud of having evaded paying into social security for decades, until he reached retirement age and realized that he had outsmarted himself.
It is always cheaper to file and request a payment plan than not to file. The IRS will issue a refund for returns filed three years late, but in the case of a balance due, the clock starts ticking immediately for penalties and interest. For small business owners who have not filed in years, this is a correctable problem. Joe Plumber can file returns for back years, but he will have to either do the work of reconstructing the returns himself or pay for help.
Free tax preparation is available at the Bellingham Public Library (run by AARP), Western Washington University and Whatcom Community College (run by Volunteer Income Tax Assistance.) Check the web for hours. The volunteers' scope is limited to the current tax year. Joe Plumber is out luck for his back year returns. People with very complicated tax situations will also fall outside VITA's scope, but usually those folks can afford to pay for professional help. Bring photo ID, everybody's social security cards, all tax documents and last year's tax return if you have it.
I'm on Friday mornings (except when the college is not in session) at the Heiner Library at WCC. See you there.