Most people who are eligible for the earned income tax credit (EITC) and the child tax credit (CTC) claim those credits. Together, these credits lifted 6.4 million people out of poverty in 2023, more than any other federal program outside of Social Security. But some eligible people miss out on those credits. Direct File—the IRS’s new online tool for filing tax returns—may be the key to getting eligible filers to claim the EITC and CTC.
Direct File guides people through their tax returns in an intuitive interview style and then empowers them to file their returns for free—from computers, tablets, or smartphones. The IRS piloted the program last year in 12 states, and survey findings on how it was received were remarkable: 90 percent of respondents ranked their experience with Direct File as excellent or above average.
This year, millions of residents of 25 states can use Direct File, including the six largest: California, Texas, Florida, New York, Pennsylvania, and Illinois.
Direct File serves only people with relatively simple returns—for example, filers with wage income but not those with self-employment income. But importantly, low- and middle-income eligible filers can use it to claim several tax credits, including the EITC and the CTC.
Census estimates that about 78 percent of eligible families receive the EITC and 93 percent receive the CTC (high rates relative to other benefits). The most common reason an eligible person fails to receive an EITC or CTC is that they do not file a tax return. In most cases, they earn so little income, they aren’t legally obligated to file.
New IRS research confirms that once people file a tax return, they are highly likely to claim these credits if they are eligible, particularly if they file electronically. IRS estimates credit participation among eligible tax filers is over 97 percent for the EITC and even higher for the CTC.
There are at least a couple of reasons people might not file a return. For one, they might decide that any benefits they could get aren’t worth it. People who are eligible for small credits, including workers without children at home, have much lower credit participation than others. The benefit they’re eligible for can be worth less than the average cost of paying a tax preparer to complete the return. Direct File is free, which may turn the tables on a taxpayer’s cost calculation.
Filing taxes is complicated. Taxpayers who used Direct File last year said it was an easier tax preparation method than they had previously used. When word spreads about Direct File, its relative ease might further encourage both tax filing and credit claiming.
The EITC and CTC provide critical support to low- and moderate-income families. Direct File might help more eligible families unlock these benefits—both those who prepare their own returns and those who do not file at all—by giving them an intuitive, low-cost option to file their taxes.
From December 2023 to December 2024, Elaine Maag was a Tax Policy Advisor at the US Department of the Treasury.
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