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Tax Preparers Face Fiscal Cliff Problems

Adam Rust's picture

Posted December 31, 2012

While a lot of the discussion surrounding the fiscal cliff has focused on how much the rich should have to pay, the consequences reach farther and deeper. For the poor, the prospect is not just that fewer will receive entitlements. Yes, cuts to all kinds of benefits programs are possible. But tax increases would be spread to the poor, as well.

The negotiations in Washington over our tax code could have wide-reaching consequences for the tax preparation firms that serve low-income consumers. Many filers that might have qualified for a tax refund in years past

would no longer do so if the Bush tax cuts expire.

The Tax Policy Center offers some hypothetical tax scenarios:

  • For a single mother with two children who earns $23,575, the fiscal cliff raises her taxes by $2,438. She ultimately receives a refundable tax credit of $1,101. She receives no child tax credit. Her earned income tax credit is unchanged.
  • For a married couple with two children under the age of 13 with an income of $31,000, tax liability increases from negative (-$1,502) to positive ($2,224). Child tax credit drops to $88 from $2,000 and earned income credit drops from $3,639 to $2,514.
  • For a single head of household with two children under the age of 13 and income of $41,000, tax liability increases from $4,581 to $7,729. The child tax credit due to the filer drops from $2,000 to $388.  Final tax liability exceeds prepaid payroll tax payments.

For the preparers that serve a lower-income demographic, this reset creates a variety of problems. Most significantly, it increases the possibility that demand for bank products will drop. The math is simple - more people are going to owe. Without a refund, there is no need for a refund anticipation check, nor for the variety of additional products that can be attached to that service.

Moreover, it interrupts the traditional mode of business. Some tax prep shops do almost all of their business before February 15th. After that, they maintain a skeleton crew until April 15th. Some close down entirely in order to save on operating costs. When people expect a refund, they come in early. When they expect to owe, they put off doing their taxes.

Last, low-income filers will need fewer forms once we go over the fiscal cliff falls. Not as many filers are going to need to fill out their a form 8812, for example, because fewer are going to receive a child tax credit.