Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC), sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. Congress originally created the tax credit legislation in 1975, in part to offset the burden of social security payroll taxes. EITC is designed to “make work pay.” It rewards low-wage work by decreasing the taxes that low-wage workers pay on their earnings and by supplementing their wages. The intention is to bring a family with a full-time minimum-wage worker to the poverty line, so as to avoid having to raise a child in poverty. The EITC is the largest poverty-reduction program in the U.S. and is responsible for lifting five million people out of poverty, half of them children, each year.
In 2007, approximately 24 million taxpayers received over $48 billion in EITC benefits, yet tthe IRS estimates that between twenty and twenty-five percent of eligible taxpayers are not taking advantage of the credit. Studies have shown that the EITC generates large decreases in poverty and substantial increases in employment, as well as decreasing the number of single parents receiving cash welfare. It also produces a “multiplier effect”; it is estimated that every $1 paid out in the EITC generates $1.50–2.00 in local economic activity. The EITC does not generally affect eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, or low-income housing. Unlike other tax provisions, the EITC is supported by both progressives and conservatives because of its anti-poverty, incentive to work structure.
The EITC works by reducing the amount of federal tax owed by those who claim and qualify for the credit. What makes it so effective is that when the EITC exceeds the amount of taxes owed, the tax filer gets a full refund of any remaining amount, even if the worker’s tax liability is zero. In order to receive EITC, low-income workers must file a tax return (even if they do not owe any federal income tax) and the amount a family receives from the EITC depends upon their combined earned income and number of children. As a family’s income rises, EITC benefits are gradually phased out on a sliding scale. Below you can see a graph of the phase-in/phase-out range of the EITC.
Here are the specific 2008 maximum eligible incomes and benefits:
Number of Children
|Maximum Income (Married Filing Jointly)||Maximum Income
(Single/Head of HH)
|Maximum EITC Benefit|
|One Qualifying Child||$36,995||$33,995||$2,917|
|Two or More Qualifying Children||$41,646||$38,646||$4,824|
Expanding EITC Benefits for Workers without Children, Married Couples, and Larger Families
The EITC has created enormous benefits for American families for the last thirty years. However, it still needs improvement. One area of concern is the huge discrepancy in benefits between tax filers with children and those without children. In 2007, a taxpayer with no children was eligible for less than one-tenth the benefit a family with two children received ($438 v. $4,716). This amount at best will offset only a portion of the worker’s federal taxes, and not supplement income as was intended. According to the Brookings Institution, a single worker with no children earning income at the 2008 poverty line ($11,014) would owe nearly $1,000 in federal taxes even after receiving the EITC. At a time when the economy is stalling and workers are hurting, we should not be adding salt to the wound by taxing low-income workers into poverty for simply playing by the rules.
Another area of improvement with the EITC concerns the penalty against dual-income low-wage workers, or “marriage penalty.” If an EITC-eligible single parent chooses to marry another low-income worker, they stand to lose some or all of their EITC. This is because they must combine their incomes for EITC purposes, and since the EITC phases out at higher incomes, they risk reducing their credit or losing their eligibility altogether.
Also, families with three or more children are more likely to be low-income than any other sized families. However, the EITC makes no adjustment for these families; they are eligible for the same credit that two children households get despite having higher expenses.
The Brookings Institution released a report in June 2008, Metro Raise: Boosting the Earned Income tax Credit to Help Metropolitan Workers and Families, that offers specific reform recommendations. The report says that the federal government should expand EITC to alleviate poverty, make work pay, and help low-wage workers and lower-income families meet rising costs of living. Specific recommendations are:
Triple the maximum EITC for low-income, childless workers and non-custodial parents.
Allow married couples to exclude one-half of a second earner’s income to reduce disincentives.
Expand EITC for families with three or more children.
Create a new, streamlined periodic payment option.
EITC Improvements in the American Recovery and Reinvestment Act
In February 2009, the House and Senate passed the American Recovery and Reinvestment Act of 2009 (ARRA), which included several EITC improvements mentioned above. First, Congress addressed the issue of the “marriage penalty” by raising the phase-out income level for married couples. This will allow married couples to have a higher combined income level and still get the EITC, thus reducing the impact of this penalty. This change applies to tax years 2009 and 2010.
Congress also expanded the EITC benefit for larger families. Families with three or more children can now receive an EITC benefit of up to 45 percent of their earned income, as compared to 40 percent for families with two children. This change also applies to tax years 2009 and 2010.
RESULTS applauds these changes and will continue to work to see that improvements to the EITC like these and others are permanently enacted.
For more details about the ARRA, please see our Recent Developments Page.
For more information
RESULTS Make Taxes Fair Recent Developments Page
Internal Revenue Service EITC overview
The Center on Budget and Policy Priorities’ (CBPP) Earned Income Tax Credit Outreach Kit (2008)
Brookings Institution’s Earned Income Tax Credit Series
CBPP The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor, revised August 17, 2005
The Coalition on Human Needs’ Tax Policy section, which may have info on EITC
National Women’s Law Center’s educational/outreach materials