Earned Income Tax Credit (US) - Overview

Overview

The Earned income tax credit has been part of political debates regarding whether to raise the minimum wage or whether to increase the earned income credit, with the EIC being targeted to persons and couples taking care of children (with parents receiving preference over other family members).

A qualifying child must meet the three tests of age, relationship, and shared residence. Foster children also count provided they have either been officially placed or are a member of one’s extended family. A “child” can be up to and including age 18. A child classified as a full-time student for five calendar months can be up to and including age 23. If a person is classified as "permanently and totally disabled" for the year (physician states one year or more), he or she can be any age and still count as one’s qualifying “child” provided the other requirements are met. Parents must claim their child(ren) if eligible unless they are waiving this year's credit to an extended family member who has a higher AGI. There is no support test for EIC. There is a six month plus one day shared residency test.

For tax year 2011, the maximum EITC for a single person or a married couple filing jointly without qualifying children is $464, up from $457 in tax year 2010. The maximum EITC for a single person or a married couple filing jointly with one child is $3,094, up from $3,050 in 2010, for a single person or a married couple filing jointly with two children is $5,112, up from $5,036 in 2010, and for a single person or a married couple filing jointly with three or more children is $5,751, up from $5,666 in 2010. Most people do not receive the maximum credit. EIC phases in slowly, has a medium-length plateau, and then phases out more slowly than it phased in. And since the credit phases out at 21% (two or more children) or 16% (one child), it is always preferable to have one more dollar of actual salary or wages on "the margin" (and technically, since the table for the EIC moves by fifty dollar increments, it's always preferable to have an extra fifty-dollar increment of salary or wages).

Enacted in 1975, the initially modest EIC has been expanded by tax legislation on a number of occasions, including the widely-publicized Reagan Tax Reform Act of 1986, and was further expanded in 1990, 1993, and 2001, regardless of whether the act in general raised taxes (1990, 1993), lowered taxes (2001), or eliminated other deductions and credits (1986).

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. Effective for the 2010, 2011, 2012 and 2013 filing seasons, the EITC will support these taxpayers by:

• Increasing 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.
• Increasing 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).

Today, the EITC is one of the largest anti-poverty tools in the United States (despite the fact that most income measures, including the poverty rate, do not account for the credit).

Other countries with programs similar to the EITC include the United Kingdom (see: working tax credit), Canada, New Zealand, Austria, Belgium, Denmark, Finland, Sweden, France and the Netherlands. In some cases, these are small. For example, the maximum EITC in Finland is €290. Sweden has a medium credit with the maximum slightly above 21 000 Swedish kronor or about $3000 US. The ("jobbskatteavdrag" was introduced in 2006 and expanded in consecutive steps 2007–2010). Others are larger than the U.S. credit, such as the UK's working tax credit, which is worth up to £7782.

As of early 2012, 26 states have enacted state EITCs: Colorado, Connecticut, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, Rhode Island, Vermont, Virginia, Washington, and Wisconsin. Some of these state EICs are refundable, and some are not. In addition, a few small local EICs have been enacted in San Francisco, New York City, and Montgomery County, Maryland.