Earned Income Tax Credit 101
From the Center for American Progress
What is the Earned Income Tax Credit?
The Earned Income Tax Credit is a refundable federal income tax credit for low-income working individuals and families. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. The Earned Income Tax Credit was responsible for significant declines in poverty and economic gains during the 1990s, but it can still be strengthened to improve its effectiveness.
The Center for American Progress has proposed four ways to improve the existing EITC so that poor families can better help themselves rise out of poverty while stimulating consumer spending and economic growth.
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Current Credit: Under the current law, the fact that the income of both spouses is fully counted in the EITC benefit calculation means that an EITC benefit may be reduced or lost if two low-earning individuals married. In addition, the rules may discourage both spouses from increasing their hours of work.
CAP Improvement: Half of the earnings of the lower-earning spouse should be excluded if doing so would result in a larger EITC for the family.
Result: An increased credit would provide greater incentive for both partners to join the labor force, especially full-time, leading to increased employment and pulling families out of poverty, and would reduce the potential marriage disincentive that operates in the current structure.
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Current Credit: Families with three or more children receive the same EITC benefit—40 percent of initial earnings—as families with two children.
CAP Improvement: The EITC benefit for these families should be increased from 40 percent to 45 percent of initial earnings.
Result: About 3 million low-income families would be eligible to receive a maximum credit of $5,310, instead of a previous maximum credit of $4,716.
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Current Credit: Childless workers are not eligible for the EITC until they are 25 years old.
CAP Improvement: The EITC should be extended to childless workers ages 18 to 24 who are not full-time students.
Result: 1.6 million poor childless workers would receive the EITC, encouraging them to increase their employment, increasing their spending power, and pumping money into the national economy.
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Current Credit: Poor, non-resident fathers are underemployed, with only 50 percent employed and 8 percent working year round with median earnings of $5,000.
CAP Improvement: Increase EITC benefits for childless workers from 7.6 percent to 20 percent of initial earnings, almost triple the current level.
Result: The EITC increase will provide increased incentives for employment among poor adults, increasing their spending power and benefiting the economy.
Read the full issue brief here.
