Policy Basics: The Earned Income Tax Credit
August 20, 2015
The Earned Income Tax Credit (EITC) is a federal tax credit for low- and moderate-income working people. It encourages and rewards work as well as offsets federal payroll and income taxes. Twenty-six states, plus the District of Columbia, have established their own EITCs to supplement the federal credit.
Who Is Eligible, and for How Much?
In the 2015 tax year, working families with children that have annual incomes below about $39,000 to $53,300 (depending on marital status and the number of dependent children) may be eligible for the federal EITC. Also, working-poor people who have no children and have incomes below about $14,800 ($20,300 for a married couple) can receive a very small EITC. In the 2013 tax year, the most recent year for which data are available, over 27 million working families and individuals received the EITC.
The amount of EITC depends on a recipient’s income, marital status, and number of children. As the figure shows, workers receive the credit beginning with their first dollar of earned income; the amount of the credit rises with earned income until it reaches a maximum level and then begins to phase out at higher income levels (see the table at the end of this piece for how the EITC is calculated). The EITC is “refundable,” which means that if it exceeds a low-wage worker’s income tax liability, the IRS will refund the balance.
During the 2013 tax year, the average EITC was $3,074 for a family with children (boosting wages by about $256 a month), compared with just $281 for a family without children.
Research indicates that families mostly use the EITC to pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases, obtain additional education or training to boost their employability and earning power.
Encouraging and Rewarding Work
The EITC is designed to encourage and reward work. As noted, a worker’s EITC grows with each additional dollar of earnings until reaching the maximum value. This creates an incentive for people to leave welfare for work and for low-wage workers to increase their work hours.
This incentive feature has made the EITC highly successful. Studies show that the EITC encourages large numbers of single parents to leave welfare for work, especially when the labor market is strong.
Specifically, a highly regarded study found that EITC expansions are the most important reason why employment rose among single mothers with children during the 1990s — the EITC was more effective in encouraging work than either welfare reform or the strong economy.
In 2013, the EITC lifted about 6.2 million people out of poverty, including about 3.2 million children. The number of poor children would have been one-quarter higher without the EITC. The credit reduced the severity of poverty for another 21.6 million people, including 7.8 million children. In combination with the Child Tax Credit (CTC), the EITC lifts even more families with children out of poverty (see figure).
The EITC reduces poverty by supplementing the earnings of low-wage workers and by encouraging work. There has been broad bipartisan agreement that a two-parent family with two children with a full-time, minimum-wage worker should not have to raise its children in poverty. At the federal minimum wage’s current level, such a family can move above the poverty line only if it receives the EITC as well as SNAP (food stamp) benefits.
Moving out of poverty is particularly important for young children. Research has found that lifting low-income families’ income when a child is young not only tends to improve a child’s immediate well-being, but is associated with better health, more schooling, more hours worked, and higher earnings in adulthood. A burgeoning literature links EITC receipt to improved school performance and higher college attendance rates.
Key Provisions of the EITC at Risk of Expiring
Unless Congress acts, two key provisions of the EITC will expire at the end of 2017. If this happens:
Larger families will face a cut in their EITC. After 2017, the maximum EITC for families with more than two children will fall by more than $700, to the level of the maximum EITC for families with two children.
Many married couples will face higher marriage penalties and cuts to their EITC. Currently, to reduce the marriage tax penalty, the EITC begins to phase out at an income level $5,000 higher for married couples than for single filers. After 2017, it will only be $3,000 higher, which will cut the EITC for many low-income married couples and increase the marriage penalty for many two-earner families.
Allowing the EITC provisions and a key provision of the CTC to expire at the end of 2017 will push 16 million people in low- and moderate-income working families, including 8 million children, into, or deeper into, poverty.
A Hole in the EITC
In contrast to the EITC for families with children, the EITC for childless workers remains extremely small — too small even to fully offset federal taxes for workers at the poverty line. Under current law, a childless adult or noncustodial parent working full-time, year-round at the federal minimum wage is ineligible for the EITC. (Such an individual would receive the maximum EITC if he or she had children.) As a result, low-wage workers not raising minor children are the sole group that the federal tax system taxes into or deeper into poverty.
For more on the EITC and Child Tax Credit, see “EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds.”
2015 Earned Income Tax Credit Parameters
Working households qualify for an EITC based on earnings. Beginning with the first dollar of earnings, as a low-income household earns more, its EITC increases (“phasing in”). As the EITC phases in, it is calculated at a set percentage of earnings called the “phase-in rate,” which depends on marital status and number of children. For example, a married couple with two children has an EITC phase-in rate of 40 percent, so for each dollar this family earns up to a certain level, its EITC increases by 40 cents. The phase-in ends when the EITC reaches its maximum amount. For households whose income falls between the point where the phase-in ends and a second, higher threshold, the EITC stays constant at the maximum amount. For households whose income is above the second threshold, the point where the EITC phase-out begins, a household’s EITC amount decreases by a set percentage of income (the “phase-out rate”) until the EITC is reduced to zero, where the phase-out ends.
|2015 Earned Income Tax Credit Parameters
(Filing status single a)
|Phase-in rate||Phase-in ends||Maximum credit amount||Phase-out begins||Phase-out rate||Phase-out ends|
|2015 Earned Income Tax Credit Parameters
(Filing status married filing jointly)
|Phase-in rate||Phase-in ends||Maximum credit amount||Phase-out rate||Phase-out begins||Phase-out ends|