Overlooking Potential Thousands: Commonly Overlooked Unclaimed Tax Credits and Deductions
Overlooking Potential Thousands: Commonly Overlooked Unclaimed Tax Credits and Deductions
Every tax filing season, a huge number of taxpayers fail to fully capitalize on their potential tax refunds, leaving billions of dollars in unclaimed tax credits and deductions behind. The Internal Revenue Service (IRS) has been working to educate taxpayers and simplify the filing process, but a significant gap persists between what taxpayers are entitled to and what they actually claim.
This gap in tax benefits underscores the hurdles that countless individuals and families face in dealing with a complex tax system. This gap could significantly impact household budgets, particularly for low- and moderate-income families who stand to benefit the most from unclaimed benefits. The issue encompasses various financial assistance programs, such as the Earned Income Tax Credit (EITC) and education-related credits and deductions.
A recent IRS report sheds light on the magnitude of this problem and identifies some of the key factors contributing to it. Understanding this gap is pivotal for both individuals missing out on potential refunds and policymakers striving to develop a fairer and more effective tax system.
Gap in Tax Benefits
The gap in tax benefits essentially signifies the disparity between the tax incentives taxpayers are eligible for and what they actually claim. This gap can be attributed to a variety of causes, such as a lack of awareness concerning eligibility, difficulties in comprehending requirements, and more substantial roadblocks like inaccessible filing tools or inadequate public guidance.
Tax incentives come in various forms, including tax deductions that decrease taxable income and lower the amount of tax owed, non-refundable tax credits that reduce tax liability only up to the extent of taxes owed, and refundable tax credits that reduce tax liability and allow taxpayers to receive any surplus as a refund, even if no taxes are due.
Low- and moderate-income families often grapple with the intricacy of refundable credits, like the EITC or the Child Tax Credit (CTC). Other groups, mainly non-filers, may not even realize they qualify for such benefits, assuming that if they do not owe taxes and do not have to file, there is no further action required.
The IRS report reveals some insight into these challenges, quantifying the gap and pinpointing which tax incentives are most frequently overlooked.
Findings of the Report
The IRS report, released recently, utilizes tax year 2022 data and discloses some striking statistics concerning unclaimed benefits. Noteworthy gaps persist in three primary areas: the EITC, the CTC, and education credits, including the American Opportunity Tax Credit and the Lifetime Learning Credit.
More than 470,000 taxpayers contributed to an estimated $864 million credit gap for the EITC, while 110,000 taxpayers contributed to a $133 million CTC credit gap. Education credits contributed to a staggering $6.3 billion estimated credit gap among 6 million taxpayers—an area that demands increased attention.
One of the reasons for the overall gap, as well as the shortfalls in individual programs, may be the challenge in navigating the filing process. Filing taxes can be daunting, particularly for individuals with limited financial resources or without access to professional assistance—making tools like IRS Direct File essential investments.
Consequences of the Gaps
The pervasive gaps in claimed tax incentives have far-reaching ramifications, impacting individuals, families, and the tax system as a whole. The millions of taxpayers who forgo these benefits experience immediate and personal repercussions, such as lost EITC and CTC benefits amounting to hundreds or even thousands of dollars that could alleviate financial pressure, cover expenses, or boost long-term savings.
At a broader level, these gaps reveal disparities within the tax system: those most in need of financial assistance often encounter the greatest hurdles in accessing it. Each time a public assistance program is introduced into the tax code, aimed at alleviating burdens and assisting vulnerable populations, its success relies on eligible taxpayers fully utilizing the benefits. When they do not, the intended impact of the program is diminished despite efforts to expand the credit or deduction.
The gaps in claimed benefits shed light on broader issues of accessibility and comprehension within the tax system and call for increased investment in taxpayer education programs. By addressing the twin barriers of information and access, there is an opportunity to assist individuals and families in maximizing the benefits already available to them through existing tax provisions.
The gap in tax benefits, particularly for low- and moderate-income families, can result in significant financial losses. For instance, over 470,000 taxpayers potentially missed out on over $864 million in Earned Income Tax Credit (EITC) alone. Effective use of tools like IRS Direct File can simplify the filing process, helping taxpayers avoid such monetary losses due to unclaimed tax benefits.
The pervasive gaps in tax benefits also highlight the need for ongoing education and simplification efforts. Policymakers and the IRS can work together to ensure that eligible taxpayers better understand their entitlements and avail of the full spectrum of tax deductions and credits, thereby creating a fairer and more effective tax system.