April 2010 U.S. Poverty Action
Low-income Tax Credits Help Families Stay Out of Poverty
Low-income Tax Credits: Poverty’s Little-Known Nemesis
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 decreasing the impact of taxes that low-wage workers pay on their earnings, and 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 Center on Budget and Policy Priorities (CBPP) estimates that in 2009, the EITC lifted 6.6 million people out of poverty, half of them children.
The key to the EITC is its refundability. A refundable tax credit allows taxpayers to receive a refund if their credit it greater than their tax bill. Since many low-income workers owe little or no income taxes (however, they do pay payroll, sales, property, and other state and local taxes), the EITC can be a significant boost to their income. For tax year 2008, approximately 24 million taxpayers received over $49 billion in EITC benefits and the average net EITC was $2,068.
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. The EITC phases out as household income increases. Before ARRA, if an EITC-eligible worker married another low-income worker, they could both lose some or all of their EITC because they must combine their incomes for EITC purposes. ARRA raised 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. Because of ARRA, families with three or more children can now receive an EITC of up to 45 percent of their earned income, as compared to 40 percent for families with two children. These much-needed changes have benefited 7 million people, keeping 3 million people out of poverty.
The Child Tax Credit (CTC) is a partially-refundable tax credit designed to lessen the impact of income taxes for families raising children. The CTC is the largest tax code provision benefiting families with children, distributing about $45 billion to 31 million families in 2007. Persons with at least one qualifying child who file federal tax returns can get a CTC of up to $1,000 for each child. To qualify for the CTC, the tax filer’s earned income must be above a certain threshold ($3,000 in 2009). The credit is phased in as earned income goes above the threshold, until the maximum $1,000 credit is reached. The credit is then gradually phased out at very high income levels, and there is no credit available to those with incomes above $75,000 for single persons ($110,000 for married couples).
The ARRA lowered the CTC threshold to $3,000 for tax years 2009 and 2010. The Center on Budget and Policy Priorities (CBPP) estimates this opened up the CTC to nearly 6 million new children and expand the credit for 20 million more, as compared to 2007 law. The current CTC, while a vast improvement over previous law, still excludes America’s poorest families (those who earn less than $3,000 per year). Also, the credit is only partially refundable thus requiring low-income families to earn more to receive the full $1,000 credit as a refund.
Allowing EITC and CTC Changes to Expire Means More People Falling into Poverty
The expansions of the EITC and CTC will expire at the end of this year. If they do, 7.7 million families nationwide will lose the EITC benefits gained under ARRA. Furthermore, if the $3,000 CTC income threshold expires, it will jump to well over $12,000. As a result, CBPP estimates that families with incomes above $10,000 would be hit the hardest, experiencing 80 percent of the losses. In an economy that is slow to recover and not expected to reach full employment for several years, we cannot cut these families off at the knees just when they are trying to stand up.
Fortunately, President Obama’s budget includes a proposal to make these temporary EITC and CTC changes permanent, and Senate Finance Chairman Max Baucus recently introduced legislation that would do the same. However, in an election year, a partisan political climate, and calls for deficit reduction, passage of these changes is not guaranteed by any means.
Congress will have to pass some form of tax legislation in 2010. While overall tax reform is not likely to happen this year due to the length of the health care debate, the expiring Bush tax cuts and the current estate tax repeal will have to be dealt with. This provides an opening for RESULTS and our allies to pass the EITC and CTC provisions that are necessary to keep millions of Americans out of poverty. Because of the upcoming elections, these tax vehicles could move in the next few months, so we want to be ready when they do.
To close, let’s remind ourselves what’s really at stake for low-income families with this story:
My name is Teffany Horne, and my family is one of the 350,000 working families in Maryland that rely on the Earned Income Credit.... I have been a working mother for 20 years, and during this time, the EIC has assisted me in many ways: It has helped me get out of debt. Twice, it has helped me buy a car so I had reliable transportation to get to work. It has helped me provide things for my two children, especially my son who has cerebral palsy. When my son’s wheel chair needed repair and insurance didn’t cover it, I paid for [it] with part of my EIC. Another time, I used the EIC to build a ramp into our apartment, so my son could get in and out of his wheelchair.
Every year, I go to one of the free tax preparation sites [sponsored by the Baltimore CASH Campaign] to file my taxes. It doesn’t cost me one penny, so I get to put the full value of my tax refund toward the needs of my family. I give back by helping the Baltimore CASH Campaign spread the word. As a Neighborhood Ambassador, I talk to people in my family, in my community, at work, and at church, and let them know that free services exist to help them file their tax return. I hope anyone listening today will take time to find out about [these kinds of services] to help them keep their refund dollars and build toward their dreams.