Misunderstandings keep families from claiming tax credits

Lack of awareness, fear of mistakes and penalties, and the cost of filing are preventing many families from claiming millions of dollars in tax credits, according to a new study.

The report, released Tuesday by the New Practice Lab at New America, surveyed over 5,000 respondents to learn why so many households fail to claim the Child Tax Credit, the Earned Income Tax Credit and other tax breaks that could help them.

Awareness gaps were a big barrier. Among households earning under $10,000 annually, 36% were unaware of any tax credits, more than double the rate among households earning over $150,000 (17%).

Misunderstanding their eligibility also kept many taxpayers from filing their annual returns. One-third of lower-income households earning under $26,000 who hadn’t filed taxes in the past three years said they didn’t file because they believed their income was too low. But within this group, 20% had earned income and 37% had children — factors that probably would have made them eligible for claiming the tax credits if they had filed.

Fear of making a mistake and being penalized for it was the most common barrier to filing a return, particularly among lower-income households. This fear had major consequences, as 61% of respondents who felt this way hadn’t filed tax returns in the past three years, and even when they did file, they were more likely to miss out on tax credits.

Filing a tax return can be expensive for families, forcing them to forgo other expenses in order to file. Even though 36% of survey respondents cited cost as a barrier, most had used professional tax help at some point due to concerns around navigating the process alone.

Accessing the right documents poses a challenge for taxpayers. Half of the survey respondents said they had trouble gathering the documents they needed to file their taxes, and 80% of those who faced documentation issues struggled with more than one type of document.

Most low-income households are already connected with other types of government support services, but tax credits feel like a separate disconnected area. The survey found 84% of households who had not filed taxes at all or irregularly in the past three years had participated in at least one other public support service during that same time period. 

“Accessing tax credits is often overwhelming and costly, creating unnecessary barriers for the families who need this support the most,” said Devyani Singh, lead author of the report, in a statement. “Tax credits can be a critical lifeline for families that are struggling financially, and it’s up to state Departments of Revenue to look at the process as a delivery issue. There’s no one-size-fits-all solution to increasing tax credit uptake; improving access requires a multipronged strategy combining personalized outreach, streamlined systems, and policies that meet families where they are.”

The report pointed out that such  factors are important for government agencies to consider, especially as the White House and some lawmakers in Congress express interest in increasing the amount families can get from the Child Tax Credit. However, the proposed shuttering of free tax-filing programs like Direct File, which New America was involved in studying, will make it harder for families to access these benefits. The tax reconciliation bill would also restrict access to claiming the Child Tax Credit to families with Social Security numbers as a way to deter immigrants from accessing such benefits.