Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) 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 move a family with a full-time minimum-wage worker above the poverty line, so as to avoid raising children in poverty.

The EITC is the largest poverty-reduction program in the U.S. The Census Bureau found that the EITC lifted 5.4 million above the poverty line in 2010 (see chart below). When using the new alternative poverty measure, that number climbs to 6.25 million. Furthermore, the Center on Budget and Policy Priorities (CBPP) reports that in 2009, the poverty rate among children would have been nearly one-third higher without the EITC (3.3 million of the 6.6 million people lifted out of poverty in 2009 were children). The EITC lifts more children out of poverty than any other single program or category of programs. 

For tax year 2010, approximately 26.1 million taxpayers received over $59 billion in EITC benefits. The average net EITC amount was $2,240. The IRS estimates that four out of five eligible taxpayers take 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 to $2.00 in local economic activity. The EITC does not generally affect eligibility for Medicaid, Supplemental Security Income (SSI), SNAP benefits (food stamps), or low-income housing and the cost of administering the program in proportion to claims paid is less than one percent. Unlike other tax provisions, the EITC has generally been supported by both progressives and conservatives because of its anti-poverty, incentive-to-work structure; although the heightened partisanship of the last few years has helped erode some of that bipartisan support.

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 the EITC is fully refundable; if a tax filer's EITC exceeds the amount of taxes owed, he/she gets a full refund of any remaining amount, even if the worker’s tax liability is zero. In order to receive the 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.

 

Here are the specific 2011 maximum eligible incomes and benefits:

Number of Children	Maximum Income (Married Filing Jointly)	Maximum Income (Single/Head of HH)	Maximum EITC Benefit
No Children	$18,740	$13,660	$464
One Qualifying Child	$41,132	$36,052	$3,094
Two Qualifying Children	$46,044	$40,964	$5,112
Three or More Qualifying Children	$49,078	$43,998	$5,751

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 for tax years 2009 and 2010. First, Congress addressed the issue of the "marriage penalty" in the EITC. Before ARRA, if an EITC-eligible single parent chose to marry another low-income worker, they both could lose some or all of their EITC because the couple must combine their incomes for EITC purposes. Since the EITC phases out at higher incomes, they risked reducing their credit or losing their eligibility altogether. ARRA mitigated this penalty by raising the income levels for married couples thus allowing them to have a higher combined income without losing their EITC. Congress also expanded the EITC benefit for larger families. Families with three or more children are more likely to be low-income than smaller families. However before ARRA, the EITC made no adjustment for these families; they were eligible for the same credit amount that two children households received despite having higher expenses. Because of ARRA, 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.

These much-needed changes have benefitted 7 million people, keeping 3 million out of poverty.

Expanding EITC Benefits for Married Couples, Larger Families, and Workers Without Children

The EITC has created enormous benefits for American families for the last thirty years. However, there are ways to make it more effective in reducing poverty. One way is to extend the EITC improvements for married couples and larger families made under ARRA. These long overdue changes were only temporary in ARRA and were set to expire at the end of 2010. In December 2010, Congress passed the Tax Relief Act of 2010 which extended these improvements for two more years. RESULTS strongly urges Congress to make the EITC changes from ARRA permanent. If no action is taken, these changes will disappear in 2013, thus hurting families who need help most.

Another area for improvement concerns the huge discrepancy in benefits between tax filers with children and those without children. In tax year 2011, a taxpayer with no children is eligible for less than one-tenth the benefit a family with two children received. 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. This also has an effect on non-custodial parents. Even though these parents have child support obligations, because their children live elsewhere, these parents cannot claim the larger EITC parents with children receive. They are considered adults without children and can only claim the much-lower credit mentioned above. At a time when the economy is struggling 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. Congress should triple the EITC for workers without children.

Additional Resources:

RESULTS Economic Opportunity Recent Developments Page

Internal Revenue Service (IRS) EITC overview.

The Center on Budget and Policy Priorities’ (CBPP) Policy Basics: The Earned Income Tax Credit

Brookings Institution’s Earned Income Tax Credit Series, EITC Data by State and Congressional District, and EITC Interactive: Explore Tax Return Data from 1997-2007

National Women’s Law Center’s Tax Credits Outreach Campaign materials

RESULTS' Volunteer Income Tax Assistance Program (VITA) page

IRS' VITA program locator. Find a local VITA site near you with this tool.