Earned Income Tax Credit

On this page: Taxation

Background

The earned income tax credit (EITC) is a major federal program to assist the working poor. Created in 1975, this refundable tax credit grew into the largest antipoverty entitlement program. About 28.5 million working families and individuals claimed $68.3 billion through the EITC for tax year 2014.

The amount of the EITC depends on earned income and the number of qualifying children. There are four schedules of benefits; the maximum credit increases with the number of children, so that families with three or more children can potentially qualify for a credit of more than $6,000. The maximum size of the credit for childless workers is much lower: less than $500. While there is no age restriction for taxpayers who have qualifying children, recipients without a qualifying child must be between the ages of 25 and 64 to be eligible.

Participation rates in the EITC are higher than those for many other low-income assistance programs and tax subsidies. Still, the credit may be underutilized by eligible workers who are confused by the eligibility criteria or who simply do not know about the program. The AARP Tax-Aide counseling program is an important resource available to help low-income workers claim the credit. The Tax-Aide program helped 218,866 taxpayers receive $258 million in EITC benefits in 2013.

The complicated structure of the credit decreases its effectiveness, hinders compliance, and raises administrative costs. Abuse of the credit has been a concern over the years. While the EITC reduces marginal tax rates for the lowest-income workers, encouraging them to enter the workforce, the phaseout of the credit increases marginal tax rates and creates marriage tax penalties for families with slightly higher income. Nevertheless, the EITC is widely believed to provide critical income support and work incentives to low-income families at a low administrative cost.

Twenty-five states and the District of Columbia offer state analogs of EITCs. The provisions typically enjoy wide support from businesses and social service advocates. State EITCs can help increase the financial security of workers with children and can complement welfare reform by helping low-wage workers support their families as they leave public assistance. These credits also make state tax systems more progressiv

Earned Income Tax Credit: Policy

Earned income tax credit (EITC)

In this policy: FederalStateTaxationincome taxincentiveearned income taxlow income

Congress should extend the EITC to low-income workers with no dependents, regardless of age, provided they are not dependents themselves.

Congress should provide the Internal Revenue Service (IRS) with the revenue necessary to fund education and counseling programs that would encourage eligible taxpayers to obtain the credit. The IRS should increase funding for tax-assistance programs to help low-income workers eligible to receive the credit.

When states are experiencing surpluses that allow them to cut taxes, they should enact or expand EITCs so that low- and moderate-income workers and their families can also share in the tax benefits of prosperity.

States should allow working people of all ages who are not dependents to benefit from the state EITC.