It’s the one time of year when many people get a chance to see their complete financial picture. Taking a close look at your tax information can be the key to saving money in the future and improving your overall financial position, according to J. Michael Collins, family and consumer economics specialist with the University of Wisconsin-Extension.
Low-income working families, in particular, need to be aware of the Earned Income Tax Credit, or EITC. “The Earned Income Tax Credit is the largest tax credit for low income working families,” Collins says. “Even though it has been around for more than a decade, it is under utilized.”
You can register for free at the non-profit website for more information on the EITC.
There are other credits, such as the Child Care Tax Credit, that are also designed to help working families. “For tax year 2009 (the 2010 filing season), many families who paid for child care while they worked or looked for work will qualify for a larger credit due to expansions of benefits for families with three or more dependents,” says Ruth Schriefer, University of Wisconsin-Extension family living agent. “Parents and families will receive larger refunds than they might expect, or at least larger than they received last year.”
For working families struggling to make ends meet, starting a savings account might seem out of reach. But studies suggest that when refunds exceed expectations, the odds of taxpayers saving some of the “surplus” goes up.
“If your refund is higher than you expect this year, now is the time to think about putting some of it into savings,” says Schriefer.
U.S. Savings Bonds are a good savings tool for lower-income families. “Bonds do not require a bank account and are not limited to people in ChexSystems,” says Collins. “They have the backing of the U.S. Treasury and are trusted by a wide array of consumers. Bonds have no fees and are liquid in the sense that they are easily cashed at any bank, by the Federal Reserve by mail and even online.”
Because it takes a bit of extra effort to cash in Savings Bonds, they are more likely to stay in savings compared to cash or checks. Some studies show people prefer or even need savings vehicles with a few constraints to discourage consumption. This is also why some parents and grandparents like to give Savings Bonds to children and young people.
For tax year 2010, taxpayers can buy Bonds directly on tax form 8888 in their own taxpayer name/number (in 2011, you may purchase bonds for others). The Bonds offered are I-series which change interest rates semi-annually based on inflation rates. The interest rate for 2010 is not much, but the point is that the bond is simply a safe place to store some savings
Learn more about U.S. Savings Bonds here.
Finally, for many low-income working families, simply preparing tax returns can be challenging. To help, there are a number of Volunteer Income Tax Assistance (VITA) sites in Wisconsin, located in schools, community centers or public libraries. Volunteers trained and tested by the Internal Revenue Service and the Wisconsin Dept. of Revenue prepare basic income tax returns, and many sites offer free electronic filing. This free, confidential tax assistance makes tax time easier for low-wage workers, older adults and persons with disabilities. Many who seek this free help learn that they are eligible for credits such as the EITC. Find a list of VITA sites in Wisconsin here.
Source: University of Wisconsin Cooperative Extension