The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low-income working individuals and families. The EITC is designed to “make work pay” by supplementing low-wage work with additional income. The intention is to move a family with a full-time low-income worker above the poverty line. The goal is to benefit both the worker and any children and dependents that may rely on their limited income. The EITC was created in 1975, in part to offset the burden of increased social security payroll taxes on low-wage workers.
The EITC is important because it...
Lifts millions of Americans out of poverty: In 2014, the EITC lifted 6.7 million people out of poverty. The same year, the Child Tax Credit protected approximately 3.1 million people from poverty, including about 1.6 million children. Some families are lifted above the poverty line only when the two credits work together; all told, the EITC and CTC lifted 9.8 million people out of poverty in 2014. 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.
Strengthens local economies: EITC households tend to spend their credits quickly and locally, which produces a strong "multiplier effect." It is estimated that the EITC generates at least $1.50 - $2.00 in local economic activity for every $1 claimed.
Makes work pay: Because these credits grow for low-income workers as their income increase, the EITC provides a financial incentive for workers to stay employed and increase their earnings. Study after study has shown that the EITC works to increase employment, particularly among single mothers. Studies show that this incentive works and that a majority of EITC recipients claim the credit no more than two years.
Is pro-family. They encourage responsibility and primarily benefit families with children. The Center on Budget and Policy Priorities (CBPP) reports that in 2014, the 22 percent poverty rate among children would have been nearly one-quarter higher without the EITC. The EITC lifts more children out of poverty than any other single program or category of programs.
Boosts self-esteem: A study published in the American Sociological Review found that individuals receiving EITC in Boston had higher rates of self-esteem because the tax credit program emphasized their roles as working parents and providers. The study also found that 17 percent of the lump sum amount was stowed away in savings.
In addition, the EITC (and CTC) have a strong history of bipartisan support. The EITC has been praised and expanded by Republican and Democratic administrations like, and has been celebrated by economists across the political spectrum. President Ronald Regan called the program “the best antipoverty, the best pro-family, the best job creation measure to come out of Congress.” Helping low-income working families make ends meet for their children should not be a partisan issue.
The EITC reduces the amount of federal tax owed by those who qualify and claim the credit. What makes it so effective is that the credit is fully refundable — if the tax filer's EITC exceeds the amount of taxes owed, he/she gets the difference as a tax refund, even if the worker owes zero federal income tax.
In order to receive the EITC, low-income workers must file a tax return. The amount of the credit depends upon income earned and the size of the family. Once the family hits a certain income level, their EITC starts to phase out, ensuring that only low-wage workers benefit from the EITC.
The EITC’s primary recipients are working parents with children and limited income. It can have a significant impact on families. As seen in the graph above from the Tax Policy Center, the maximum credit accrues at about $14,000 of annual income for large families and can be as high as $6,143. At more than one-third of their annual income, it is easy to see why the EITC is America’s most effective poverty-reduction program.
Here are the income limits and maximum EITC for the 2014 tax year:
|Number of Children||Maximum EITC Amount||Income Range to Receive Maximum EITC (Married Filing Jointly )||Maximum Income Allowed for Single/Head of HH to Receive the EITC (Married Filing Jointly)|
|No Children||$506||$6,480-$8,110 ($13,540)||$14,880 ($20,430)|
|One Qualifying Child||$3,373||$9,720-$17,830 ($23,260)||$39,296 ($44,846)|
|Two Qualifying Children||$5,572||$13,650-$17,830 ($23,260)||$44,648 ($50,198)|
|Three or More Qualifying Children||$6,269||$13,650-$17,830 ($23,260)||$47,955($53,505)|
In February 2009, the House and Senate passed the American Recovery and Reinvestment Act of 2009 (ARRA), which included several important improvements to the EITC. First, before ARRA, if an EITC-eligible single parent chose to marry another low-income worker, they had to combine their incomes for EITC purposes thus reducing or eliminating their credit (the EITC phases out at higher incomes), even though their financial situation had not changed much. ARRA mitigated this “marriage penalty” by allowing married couples to earn more income before the phase-out begins.
Congress also expanded the EITC for families with three or more children. These families are more likely to be low-income than smaller families, yet before 2009, they received the same EITC that two children households received. 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.
As a result of these two much-needed changes, 600,000 people were lifted out of poverty in 2012, and the depth of poverty was reduced for 10 million people. Unfortunately, these improvements were set to expire in 2010. RESULTS volunteers and our allies successfully lobbied Congress to extend these improvements for two years. The American Taxpayer Relief Act of 2012 (the "fiscal cliff" deal) extended these improvements through 2017, so they will expire in 2018 without further action by Congress. According to CBPP estimates, about 12 million people, including 7 million children, will fall into poverty or deeper into poverty if the ARRA changes to the EITC and CTC do expire.
Now is not the time to raise taxes on the lowest-income earners. It is unfathomable that in an economy where so many are still struggling, the House Republican Budget would propose to slash tax rates for wealthy Americans and large corporations while demanding that low-income families pay for them with cuts to the EITC and CTC.
To learn more about the specific impact of the expiring provisions on your state, see CBPP's state-by-state estimates.
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, and then extended them through 2017 with the American Taxpayer Relief Act of 2012. RESULTS strongly urges Congress to make the EITC changes from ARRA permanent. If no action is taken, these changes will disappear in 2018, 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. Currently, 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. The Center on Budget and Policy Priorities estimates that in 2015, a childless worker earning wages at the federal poverty line (estimated at $12,566 for 2015) would owe nearly $2,000 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.
In December 2015, Congress voted to make permanent the 2009 EITC provisions, increasing the tax credit amount for larger families and reducing the marriage penalty for joint filers.
Listen to Teffany from Baltimore, MD explain why the tax credits are important to her:
Listen to Heather from Virginia explain how the Earned Income Tax Credit expanded opportunities for her and her children:
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
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.