04/17/2012 11:16 am ET Updated Apr 17, 2012

Earned Income Tax Credit 2011: Why Sonia Figueroa Doesn't Pay Taxes

Expecting a long wait and a large tax bill, Sonia Figueroa walked into the New York Food Pantry's temporary tax preparation site in West Harlem with a fully charged iPod, two magazines and a profound sense of dread.

Workers had set up folding metal chairs in a ginned-up waiting area in what's usually the food pantry's dining room. A West Village restaurant dishwasher, reading the sports pages of El Diario La Prensa, New York's oldest Spanish-language daily, was next in line. A few rows back, waiting her turn was a Jamaican-born housekeeper who since the recession has cleaned for sisters with adjoining Park Avenue apartments. A volunteer ushered Figueroa, a full-time call center operator who last year earned $10.55 an hour before taxes, toward a seat, where she became number 14 in line.

Before Figueroa left, she had a solution to a tax problem and claimed two of the nation's mostly common refundable tax credits: the earned income tax credit for low to moderate income earners with children, and the child tax credit, an option for almost anyone with kids. Figueroa will get every penny back she paid in federal income taxes last year in a substantial IRS tax refund check.

In 2011, income tax-return filers like Figueroa collectively claimed $83 million on the basis of these two tax credits alone, according to IRS data. And 46 percent of American households will ultimately pay no federal income tax this year.

These figures trouble conservative critics of the tax system.

"The problem is, that takes away any real understanding of the cost of programs (government spending). If you take away the cost, you get more voters lobbying and demanding more government services because they are not paying for them," says Will McBride, an economist at the right-leaning Tax Foundation in Washington, D.C., and one of the federal tax policy watchers who is concerned about the growing share of tax filers who do not pay federal income tax.

The Heritage Foundation, a conservative, Washington, D.C.-based think tank, initially supported the earned income tax credit as an incentive to those who earn low wages to enter and remain in the workforce. The group now describes the refundable credit more as an insidious economic force, which has transformed tax day it into a celebrated event. According to the think tank, the credit redistributes income from top earners, who shoulder most of the nation's federal income tax burden, and expands dependency.

However, most mainstream and left-leaning economists hail the earned income and child tax credits as two of the most meaningful and substantive federal income supplements available to the working poor and to families with moderate income. And these supplements, they say, are critical to families and local economies. The left-leaning Economic Policy Institute, another Washington, D.C.-based think tank, has described the 22-year-old policy as an economic element as essential as the minimum wage. In 2010, the earned income tax credit, when factored into household income, lifted 5.2 million Americans above the poverty line, according to the most recent census data available. That figure included 3 million children. By that measure, the tax credit does more to support low-income families than food stamps or unemployment benefits.

It isn't exactly accurate to say that workers like Figueroa "pay no federal taxes," as McBride has characterized it. Anyone living in the United States pays a range of state and local levies, including sales taxes and federal gas taxes, said Roberton Williams, a senior fellow at the Washington, D.C.-based Tax Policy Center. The center is a nonpartisan think tank and joint venture of the left-leaning Urban Institute and the centrist Brookings Institution. Williams, an economist, also spent 20 years working in the nonpartisan Congressional Budget Office.

Only about 18 percent of tax filers pay no federal taxes at all, Williams said. Most of those do so because they are older (most Social Security income is not taxed, and some types of retirement income are also tax exempt) or disabled, some because they are wealthy and have no taxable income and others because they are extremely poor and are not working.

"There just isn't this mass horde of people paying nothing," said Williams.

The staff at the West Harlem food bank has seen the real effects of the earned income and child tax credits since the site began offering free income tax help a decade ago. This year, a street flower vendor's tax return made that reality especially clear.

The flower vendor had recently secured a green card, having previously been an undocumented immigrant who had filed his taxes each year with a special government-issued identification number while trying to change his immigration status. The green card put the man on a path to citizenship and made him eligible for the earned income and child tax credits. It also gave him the option of amending his returns going back to 2008. His tax refunds totaled $17,000. He's thinking of opening a store.

In a back room at the food pantry, Savereo Jackson asked Figueroa to have a seat. Figueroa had the day's essential documents at the ready: her W-2 and paperwork showing that she is the legal guardian of her niece and nephew. She wanted to be sure she had everything. Figueroa only earned $21,944 last year.

Jackson, an accounting major at Berkley College in New Jersey who is also looking for a job, says what he does as a tax prep volunteer is really nothing special. Other staff say they've seen him complete a simple tax return in 10 minutes. Figueroa's was done in 13 and a half.

"Oh my God," she said. "Had I known, I would have been here sooner."

In 2010, when Figueroa effectively worked two jobs, she earned a lifetime high of $43,000. She doesn't know many people who make that kind of money, and that year's experience didn't make her any more familiar with middle-class tax concerns like paying a tax bill, setting up a payment plan with the IRS or itemizing instead of taking the standard deduction.

Figueroa didn't file a tax return last year, after an agent at a national tax preparation chain told her that she was missing a key tax form: something to reflect earnings from her $400 per week babysitting gig. That money had nearly doubled Figueroa's income but created a mess Figueroa is still trying to sort out. Figueroa made $50 per month payments until her state tax bill was exhausted. Then IRS bill collectors began calling.

"It has been a nightmare," she said.

Jackson explained how Figueroa can obtain the missing tax document directly from the IRS and gave her the forms she will need for her 2010 return, nearly completed. After another volunteer checked Jackson's work on the 2010 and 2011 returns and confirmed the numbers, Figueroa gave Jackson the go-ahead to e-file her 2011 income tax form.

Figueroa's 2011 return totals $4,588. She owes $2,000 to the IRS in late fees and last year's taxes. So in one to two weeks, Figueroa can expect a check for $2,588 from the IRS.

"That may be the best news I've had since tax time last year," she said. "Savereo is like my tax hero."

She said she'd like to use the money to take her 15-year-old niece, Amber, on her first trip to Puerto Rico, the island from which their family comes. The rest will make it a little easier this year for Figueroa to pay her $1,000 per month rent -- which consumes 55 percent of her income.

She could book the trip at a travel agency a few blocks from her 113th St. apartment. In addition to booking trips, agents there are also preparing taxes this year for a minimum fee of $120, Figueroa said. Most years, Figueroa has paid someone -- a neighborhood tax preparer or staff at a tax-focused chain store -- to prepare her return. Two years ago, she paid a chain $300 for its services and a short-term, high interest loan that gave her access to most of her tax return right away.

Figueroa's 2010 tax debacle cost her a monthly rent subsidy she had been receiving. Her niece also receives Social Security death benefits. Both are programs that Figueroa would like to see expanded to include more families or larger subsidies. That's something she would support even if she made more money and owed a tax bill, or earned more money and didn't need the help, she said. She knows what it's like to live on very little.

On Saturday, though, her financial worries were temporarily gone.

"Tax refunds are the only thing that's even remotely good about tax time," she said. "The government gives you back your money. You pay bills and catch your breath financially for a few months. Then it starts all over again -- the worry, the bills, the stress and the whole rush to file next year."