California AB 509, EITC and Notice of Refund

The Assembly Revenue & Taxation Committee will discuss AB 509 at its May 2, 2011 hearing. AB 509 would require state agencies to do the same as is required of other employers - to notify workers that they may be eligible for the federal Earned Income Tax Credit (EITC), a refundable credit available to low-income workers. (See EDD information about this employer requirement - here.)

This is a good idea - if other employers are required to do it, why not California employers as well? Also, not everyone entitled to the EITC claims it. Per a memo from CA Board of Equalization member Betty Yee, the IRS estimates that 20% 20 25% of eligible individuals fail to claim the EITC. I'd guess this is due to the fact that the individual is below the filing threshold and does not know about the EITC and that they must file to get it. Or perhaps some people who prepare their own return don't look up the instructions when they get to the EITC line or some preparers overlook it. Here are ten reasons suggested by Hawaii Tax Help as to why some people fail to claim the EITC.

One more item overlooked (based on my anecdotal evidence of talking to students) is the need to file a return to get your overpaid tax withholding back. For example, a student told me recently (not an MST student) that she asked someone if her income level required that she file. That person (not sure if it was a paid preparer) looked it up on the IRS website and said no without asking her if she had wage withholding. She was quite puzzled when I told her she needed to file if she wanted to get her federal income tax withholding back that she had overpaid. I'm guessing this is not an unusual occurrence.

So, why not modify California law, as part of AB 509, to required all employers to not only provide the information (such as on the worker's pay stub) about the EITC, but also of the need to file to have overpaid federal and state income tax withholding refunded? The worker can be referred to the IRS interactive website that asks lots of questions to determine if there is any reason you should file including just to get your withholding refunded (here). Even better information for workers would be to give them one URL where they can go to determine if they need to file federal and California returns, or refer them to a VITA site to help them, and why they should take these actions.

What do you think?