Earned Income Tax Credit (EITC) | Tax Credits for Working Families

Tax Credits for Working Families

The Earned Income Tax Credit (EITC) is a federal tax credit for low-income working families. The EITC offsets some or all of those families’ federal income taxes and in many cases provides a supplemental source of income to help offset other taxes, including sales and payroll taxes.  The federal EITC lifts 6.3 million Americans, including 3.3 million children out of poverty each year,making it the nation’s largest and most successful anti-poverty program.

Since enactment in 1975, Congress has expanded the federal EITC many times with bi-partisan support. In tax year 2012, the EITC provided $63 billion in reduced or eliminated tax liability and cash refunds to more than 27 million low-income workers and their families, with an average EITC amount of $2,300.[1]

In the 2009 American Recovery and Reinvestment Act, the EITC was temporarily expanded for two specific groups: those families with three or more children and married couples.  This expansion was extended through December 2012 by H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, and through December 2017 in the The American Taxpayer Relief Act of 2012. This expansion:

  • Increases benefits for larger families by creating a new category or “third tier” of the EITC for families with three or more children. In this tier, the credit phases in at 45 percent of income (up from 40 percent), effectively increasing the maximum credit for these families by almost $600.
  • Increases marriage penalty relief by raising the income threshold at which the EITC begins to phase out for married couples to $5,000 above the amount for unmarried filers (an increase of $2,000).

In tax year 2014 the maximum income for single head of households is $46,997, ($52,427 married filing jointly) for families with three or more qualifying children, and less for people with fewer or no children. The maximum credit is $6,143 with three or more qualifying children and less for those with fewer children.[2]

Beginning in the mid-1980s, a number of states created local versions of the federal EITC to help offset state and local taxes for low-wage workers. Twenty-five states and the District of Columbia have created a state version of the EITC to supplement the federal credit and reduce the state and local tax burden on low- and moderate-income working families. In addition, local governments in Montgomery County, Md., San Francisco and New York City offer their own version of the EITC.

Almost all state EITCs are “refundable,” meaning that if the size of the family’s credit exceeds the amount of state income tax it owes, the family receives the difference in the form of a refund check. States with EITC programs use the same eligibility rules as the federal EITC, meaning only people who work can qualify for the credit. To simplify the process, most states typically use a fixed percentage of the federal credit to calculate the state credit. State credits range from 3.5 percent of the federal credit to 50 percent of the federal credit.

 

For more information on the federal EITC see:

Policy Basics: The Earned Income Tax Credit, Center on Budget and Policy Priorities, January 2014

Taxation and the Family: What is the Earned Income Tax Credit? Elaine Maag and Adam Carasso, Tax Policy Center, January 2014

 

For more information on state EITCs see:

Policy Basics: State Earned Income Tax Credits, Center on Budget and Policy Priorities, January, 2014

How Much Would a State Earned Income Tax Credit Cost in Fiscal Year 2015? By Erica Williams and Michael Leachman, Center on Budget and Policy Priorities, December 2013

 



[1] http://www.irs.gov/uac/Newsroom/EITC-Awareness-Day-IRS-Kicks-Off-Tax-Season-Alerting-Low-and-Moderate-Income-Workers-of-Significant-Tax-Benefit

[2] http://www.irs.gov/Individuals/Preview-of-2012-EITC-Income-Limits,-Maximum-Credit–Amounts-and-Tax-Law-Updates