There are two sides and two perspectives to every question out there. In the case of this question, whether or not a prisoner has to pay taxes, on the one side are all of the law-abiding citizens who feel that prisoners should not be given a tax-free gift by the federal government. On the other side are the prisoners themselves, who have probably created a lot of undue hardship for their family already. Perhaps they feel that on top of serving time they should not have to pay income tax (besides, how much money could they possibly be making behind bars anyway?).
Do You Have to Pay Taxes in Jail?
The truth is, prisoners are obligated to pay taxes despite being behind bars. Here’s how to file taxes while in prison .
However, because they generally make little money, their tax bracket  is typically the lowest. So how do inmates earn money within prison?
Earning Money in Jail
Inmate Financial Responsibility Program (IFRP) is a program that is supposed to help inmates become fiscally responsible, as well as to help pay legal obligations (such as child support) and reparations for crimes committed. According to the Federal Bureau of Prisons , prisoners are required to work if they are medically able to do so. Inmates working in FPI who have financial obligations must pay 50 percent of their earnings to the IFRP. Most of the funds collected—besides direct restitution payments to victims—are deposited in the Crime Victims Fund and distributed to states for victim assistance and compensation programs. As an example, the IFRP collected $8,657,558.92 in Fiscal Year 2010, and $8,594,922.76 in Fiscal Year 2011.
Payments to individual inmates are made electronically through the inmate’s trust fund account. Prison staff are able to review each prisoner’s financial obligations and monitor compliance through an automated system. Failure to satisfy financial payment plans set up by a prison hurts that prisoner’s change at parole, house assignments, work assignments, performance pay, release gratuities, and other community programs.
Average Earned Income by Prisoners
According to the Federal Bureau of Prisons, approximately 16% of work-eligible inmates work in Federal Prison Industries (FPI) factories where they gain marketable skills to benefit their transition into society one day. Assignments above entry-level can only be given to prisoners with a high school diploma or General Educational Development (GED) equivalent, and will earn a prisoner between 23¢ and $1.15 per hour. Otherwise, people who can work are given institution work assignments that include work in food service, a warehouse, or work as an inmate orderly, plumber, painter, or groundskeeper. These prisoners make between 12¢ and 40¢ per hour.
Do Prison Earnings Count as Earned Income towards the EITC?
The Earned Income Tax Credit (EITC) , introduced in 1975, is a refundable federal income tax credit  for low to moderate income working individuals and families. When the EITC exceeds the taxes that are owed, then the tax filer will receive a refund. Since it’s a refundable tax credit, the tax filer will receive a refund even if they do not owe any taxes at all. However, tax filers must earn qualifying income in order to claim this tax credit. For example, earning income from interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits), alimony and child support, welfare benefits, workers’ compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans’ benefits, including VA rehabilitation payments do not count as earned income for the sake of filing for this tax credit.
Because of it being refundable, and because prisoners make no money or very little money—meaning they are likely to be eligible for this tax credit—the federal government has banned prisoners from applying for this tax credit. The ban is in the form of excluding earned income as an inmate. Specifically, the regulation says , “Amounts received for work performed while an inmate in a penal institution are not earned income when figuring the earned income credit. This includes amounts for work performed while in a work release program or while in a halfway house.”
Prisoners and Tax Fraud
Not only do prisoners generally have to file and pay taxes, but some take the opportunity to fill out fraudulent tax forms and receive a profit. In fact, the Treasury Inspector General for Tax Administration found that in 2010, more than 91,000 inmate returns claimed $758 million in fraudulent refunds . While the IRS claims that the majority of these fraudulent claims were stopped before being sent out the door, nearly $35 million made it into the hands of prisoners who did not qualify. Prisoners do this by either stealing identities, or inflating numbers on their returns in order to show that a lot of taxes have been withheld.