Earned Income Tax Credit

Basic Concept:

  • The Earned Income Tax Credit is a tax reduction (or refund if the credit exceeds the taxes an individual owes) for working people with low to moderate incomes. In addition to the federal EITC, there may be state or local EITCs that supplement the federal credit.

Eligibility Requirements:

  • The main requirement is filing a tax return and having an earned income within a certain threshold

  • To be eligible for the EITC in TY 2019, a household’s earned income and adjusted gross income had to be below these figures for each family model:

Filing Status

Zero

One

Two

Three

Single, Head of Household or Widowed

$15,820

$41,756

$47,440

$50,594

Married, Filing Jointly

$21,710

$47,646

$53,330

$56,844

Information from IRS.gov

Program Participants:

  • Over 25 million working families and individuals claimed the EITC in TY 2019.1

  • The IRS estimates that four of five eligible people claim the EITC

  • 97% of the benefits of the EITC go to families with children.2

Benefits Provided by the EITC:

  • -The maximum amount of credit that could be earned through the EITC in TY 2018 for each family type is shown in the table below

  • -These maximum credits could be earned by either single or married households:

Qualifying Children Claimed

Zero

One

Two

Three+

Maximum Credit to be Earned

$529

$3,526

$5,828

$6,557

Information from IRS.gov

  • Most households receive a credit less than this maximum value because their earned income falls below or above the highest threshold

  • The average amount of EITC paid out in 2017 was $2,455. 3

  • About $65 billion was paid out in total. 4

  • In 2018, the EITC lifted about 5.6 million people out of poverty, including about 3 million children. The number of poor children would have been more than one-quarter higher without the EITC. The credit reduced the severity of poverty for another 16.5 million people, including 6.1 million children (according to the Center on Budget and Policy Priorities)

  • The EITC reduced the severity of poverty for another 29.1 million people (including 7.7 million children). 5

  • The EITC has extremely low administration costs -- often less than one percent -- therefore most funding to the program directly reaches the people in need

Earned Income Tax Credit and Child Tax Credit Have Powerful Anti-Poverty Impact

Shortcomings of the EITC:

  • Childless adults only receive 3% of the EITC’s benefits because of tight restrictions

    • The credit available for childless adults is significantly less than the credits for adults with children

    • Childless adults must have a disproportionately smaller income to earn the EITC

    • To earn the EITC childless adults must be at least 25 years old

    • One in five people who are eligible to claim the EITC don’t claim it

      • This means that there are millions of people who miss the opportunity to earn the credit each year

      • In order to earn the EITC individuals must earn an income

        • This excludes the unemployed and some other vulnerable populations

        • The EITC is very complex, leading to a 24% improper filing rate and predatory actions against low income Americans

          • between $14-17 billion expenditures are erroneous

          • ⅔ of low income American's file their EITC through paid, but unprofessional and unregulated, tax preparers who can exploit poor and less educated Americans. 6

State and Local EITCs:

  • 29 states (including Maryland and Virginia) and the District of Columbia, Guam, and Puerto Rico have their own EITCs

    • State EITCs range from 3.5% of the federal credit (Louisiana) to 45% of the federal credit (California)

    • Average state EITC range from $1,957 (Vermont) to $2,927 (Mississippi)

    • These EITCs reduce or refund state (or district) income taxes

For me information on state and local EITC programs, see here: https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/state-earned-income-tax-credits

Endnotes

1. Statistic from the Internal Revenue Service.

2. Statistic from the Tax Policy Center.

3. Statistic from the Internal Revenue Service.

4. Statistic from the Internal Revenue Service.

5. Statistic from the Center on Budget and Policy Priorities.

6. Statistics and Information from the Century Foundation