Earned Income Tax Credit - Overview

Overview

Foster children also count provided either the child has been officially placed or is a member of one’s extended family. A younger single parent cannot claim EIC if he or she is also claimable as a qualifying child of their parent or another older relative, which can happen in some extended family situations. This restriction does not apply to a married couple who are claiming EIC with a child, even if one or both spouses are under the age of 19. A person claiming EIC must be older than his or her qualifying child unless the “child” is classified as "permanently and totally disabled" for the tax year (physician states one year or more). A qualifying “child” can be up to and including age 18. A qualifying “child” who is a full-time student (one long semester or equivalent) can be up to and including age 23. And a person classified as "permanently and totally disabled" (one year or more) can be any age and count as one’s qualifying “child” provided the other requirements are met. Parents claim their own child(ren) if eligible unless they are waiving this year's credit to an extended family member who has higher adjusted gross income. There is no support test for EIC. There is a six month plus one day shared residency test.

A qualifying child can be a person's daughter, son, stepchild, or any further descendant (such as grandchild, great grandchild, etc.) or a person's brother, sister, half sister, half brother, stepbrother, stepsister, or any further descendant (such as niece, nephew, great-nephew, great-great-niece, etc.). A qualifying child can also be in the proces of being adopted provided he or she has been lawfully placed, as well as an unrelated foster child who has been officially placed.

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 EIC was temporarily expanded for two specific groups: married couples and families with three or more children; 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 EIC will support these taxpayers by:

• Increasing benefits for larger families by creating a new category or “third tier” of the EIC 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 EIC begins to phase out for married couples to $5,000 above the amount for unmarried filers, thereby giving MFJ filers a longer plateau. The combined plateau and phase-out range for married filing jointly is still not double that for single filers, and thus there still is a marriage penalty, just less than there used to be.

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.