Volunteer Tax Prep Is A Crash Course in Pandemic Tax Policy

A few Tax Policy Center staffers and I spend tax season volunteering for the IRS’s Volunteer Income Tax Assistance (VITA) program, providing free tax preparation services to low-income filers.

You do not need to be a tax expert to volunteer at a VITA site (it’s like an open-book test), but assisting actual people, in all their complexity, provides a crash course in how tax policy affects Americans. This was particularly true this year because so much pandemic policy was tax relief targeted at the types of households who use VITA sites.

If it were up to me, every policymaker would volunteer at a VITA site to see first-hand how their actions (or inactions) affect some of their most vulnerable constituents. But lacking omnipotence, I at least can summarize my biggest takeaways.  

Pandemic assistance was helpful but sometimes opaque

For VITA clients, the most important types of pandemic tax relief were the economic impact payments (i.e., stimulus checks), the expanded child tax credit (CTC), and the broader earned income tax credit (EITC) for childless workers. 

Remembering if three stimulus checks showed up in April 2020, January 2021, and March 2021 or if we needed to claim them on a tax return proved a bit confusing, but most clients had documentation.

Meanwhile, parents clearly remembered the monthly CTC payments they received from July to December, and every eligible client I helped received their monthly checks. (Our clients typically had an existing relationship with the IRS and were not at risk of missing out on the payments.) Further, because half of the expanded CTC was delivered on this year’s tax return, every parent I helped also left with a sizeable federal tax rebate. That said, most had little idea why the monthly CTC checks started or stopped.

The biggest complication with the stimulus checks and CTC was a long-standing problem: Who can claim a child? If a child’s parents are not married, a different parent might “claim” the child in different years. Children increasingly live in diverse families that don’t always comport to our tax code’s definitions.  

As for the larger EITC for workers without children on their return, eligible clients were pleasantly surprised to receive a larger than usual refund this year on their federal and (some) state returns. However, we warned them it’s probably only for this year.

Taxable unemployment benefits became a (familiar) withholding problem

In tax year 2020, the federal government exempted $10,200 of unemployment compensation from taxable income. But in 2021, all unemployment income was taxable on the federal return. As a result, clients with significant unemployment income often left my VITA site with large tax bills because they did not withhold tax on their benefits. 

At my site in the District of Columbia, it was particularly easy to see how this affected taxpayers because the District doesn’t tax unemployment benefits. For example, one client who had roughly equal income from unemployment compensation and his job in 2021 owed the federal government $1,000 but got a $1,000 refund from the District. (Client: “So, you’re saying I get money from one just to give it to the other?”)

Here’s what happened: On his federal return, the unemployment income created a tax liability and made his adjusted gross income (AGI) too high for the federal EITC. On his DC return, the unemployment income wasn’t taxed and his District AGI remained low enough to benefit from the District’s relatively large and refundable EITC.

But leaving policy aside for a minute, our client’s federal tax liability was the result of his failure to withhold taxes owed. We often see a similar problem with clients who get nonemployee compensation for house cleaning and construction jobs. These workers (who sometimes are mislabeled employees) don’t have tax withheld from their paychecks throughout the year and can end up owing thousands of dollars (that they don’t have) in income and payroll tax when they file. Unfortunately, the ins-and-outs of tax withholding are rarely discussed with them, especially if they speak English as a second language, until they’re staring at a massive tax bill.

In-person assistance is so valuable because taxes are so personal 

My VITA site did a mix of in-person and virtual tax preparation this year. The virtual volunteers did incredible work, but my experience convinced me of the value of in-person assistance.

For many Americans, taxes are complicated because life is complicated. Real life family and work situations don’t always translate simply onto a tax form. It takes a lot of conversation and understanding to figure these issues out and complete a client’s return.

Generous pandemic tax relief significantly helped many low-income households. But it’d also be nice if more policymakers listened to the kinds of conversations that happen at a VITA site and thought more about our clients’ types of tax complexity when crafting policy.

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