Policy Basics: The Earned Income Tax Credit #p2 #tcot

from http://www.cbpp.org/cms/index.cfm?fa=view&id=2505

The Earned Income Tax Credit (EITC) is a federal  tax credit for low- and moderate-income working people. It is designed to encourage and reward work as well as offset federal payroll and income taxes. The EITC is "refundable," which means that if it exceeds a low-wage worker's income tax liability, the IRS will refund the balance. Twenty-five states, including DC, have established their own EITCs to supplement the federal credit.

The Earned Income Tax Credit (EITC) is a federa

Who Is Eligible, and for How Much?

In 2011, working families with children that have annual incomes below about $36,000 to $49,000 (depending on marital status and the number of dependent children) may be eligible for the federal EITC. Also, working poor people without children that have incomes below about $13,600 ($18,700 for a married couple) can receive a very small EITC.

In the 2009 tax year, some 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. During the 2009 tax year, the average EITC was $2,770 for a family with children and $259 for a household 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. Beginning with the first dollar, a worker's EITC grows with each additional dollar of earnings until the credit reaches 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 have shown, for example, that the EITC — especially in the presence of a strong labor market — has encouraged large numbers of single parents to leave welfare for work. The Committee for Economic Development, an organization of 250 corporate executives and university presidents, concluded in 2000 that "The EITC has become a powerful force in dramatically raising the employment of low-income women in recent years."

Reducing Poverty

In 2009, the EITC lifted about 6 million people out of poverty, including about 3 million children. The poverty rate among children would have been nearly one-third higher without the EITC. The EITC lifts more children out of poverty than any other program.

The EITC reduces poverty by supplementing the earnings of workers with low wages and low earnings. 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 for an average family of four only if it receives the EITC as well as SNAP (food stamp) benefits.

For young children, moving out of poverty is particularly important. Research has found that lifting income in early childhood not only tends to improve a child's immediate educational outcomes, but also is associated with more schooling, more hours worked, and higher earnings in adulthood. One such study showed a link between an increase in the EITC for families with more than two children and an increase in achievement in middle childhood for children in these families.   

Strengthening the EITC

The 2009 Recovery Act (ARRA) temporarily expanded the EITC in two ways. First, it added a "third tier" of the EITC for families with three or more children. These larger families can now receive up to $629 more than families with two children. This addition recognizes that larger families face a higher cost of living and that families with three or more children are more than twice as likely as smaller families to be poor. Second, the Recovery Act expanded marriage penalty relief in the EITC, reducing the financial penalty some couples receive when they marry by allowing married couples to receive larger tax benefits.

These two expansions together benefited over 7 million people and kept an estimated 500,000 people out of poverty. They originally were scheduled to expire at the end of 2010 but Congress has extended them through 2012.

The EITC for workers without children 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 who works full time at the minimum wage is ineligible to receive any EITC benefits.  (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 only Americans whom the federal income tax taxes into poverty.