WASHINGTON – Many of Maryland’s working poor are needlessly paying to have their taxes prepared and then handing over portions of their returns for quick loans that carry high interest, according to a study released this week.
The Brookings Institution study of taxpayers receiving the earned-income tax credit looked at 27 jurisdictions around the country, including Baltimore City and Allegany County.
“Too many families in low-income communities are falling prey” to tax preparers who charge “unconscionable” interest rates, said Annie E. Casey Foundation President Douglas W. Nelson as he unveiled the study Monday.
The earned-income tax credit is available to working-poor families. Unlike most other tax credits, a family receiving the earned income credit “can claim any credit dollars left over once its tax liability has been reduced to zero,” according the Brookings report.
It found that more than one in four tax filers in Baltimore received the credit in tax year 2000, which provided an average return of $1,717 per family. Just over 15 percent of Allegany County families earned the credit at an average of $1,517.
But the report also said that 52 percent of the Baltimore families receiving the credit wound up turning a portion of it over to a commercial tax preparer in exchange for a “fast cash” refund. About 30 percent of the Allegany County families earning the credit also paid for a “refund-anticipation loans,” instead of waiting for the return check to come in the mail.
“What we have been finding is that a lot of our clients use tax preparation services,” said Courtney Thomas of the Human Resources Development Commission, a community action association in Allegany County.
“None of them are really sure of how much they are paying for the services, which is a little disturbing,” she said. “It just seems as if they get the bottom-line figure without seeing how much the companies are actually charging for the refund.”
The report said refund-anticipation loans get taxpayers an advance on their refund “only about eight to 10 days sooner” than if they had electronically filed on their own using the Internal Revenue Service’s direct- deposit refund option.
The study said a filer getting a $2,000 refund, including the earned- income tax credit, could expect to pay $100 or more in refund-anticipation loan fees. And Alan Berube, a senior research analyst at Brookings, said the fees can vary drastically from business to business.
“When we surveyed about 60 tax preparation services in and around Washington, we found that the fees ranged anywhere from $40 to $400,” he said.
Besides fees, the report said the annualized interest on such loans can run from 67 percent to an “astounding” 774 percent.
But H&R Block spokeswoman Denise Sposato said the tax preparation company makes it a point to explain the options to clients.
“It is our policy that we always discuss the other options when discussing tax preparation,” she said. “The final decision rests with them.”
Families can save money by using free tax preparation services, which are available in virtually all jurisdictions in the state, said Jennifer Williams, spokeswoman for the Maryland Earned Income Credit campaign.
One such service is the Baltimore Creating Assets, Savings and Hope (CASH) Campaign, which has 14 free tax preparation sites around the city for low-income earners, said spokeswoman Alison Beck Yonas.
CASH, a coalition of Baltimore city agencies, businesses and organizations, also provides earned income credit outreach and information on financial education programs, Yonas said.
It is one of several nonprofit groups around the country, backed by the Casey Foundation, that is trying to get the word out about free tax preparation in advance of tax season. The National Tax Assistance for Working Families campaign is using its “Earn It, Keep It, Save It” slogan to raise awareness among families eligible for the earned income credit.
Thomas, who is director of community resources and housing at the Allegany County agency, said most of her clients are coming off of Christmas and need every bit of their refund to pay their bills.
“A refund of $1,200 to $1,500 seems like a lot of money” when you make $7,000 a year, she said.