Earned Income Tax Credit

Earned Income Tax Credit
Name	Earned Income Tax Credit
Country	United States
Legislation	Tax Reduction Act of 1975
Administering agency	Internal Revenue Service
Related credits	Child Tax Credit

Earned Income Tax Credit. The Earned Income Tax Credit is a significant refundable tax credit for low- to moderate-income working individuals and families in the United States. Administered by the Internal Revenue Service, it is designed to reduce tax burdens and supplement wages, effectively lifting millions above the poverty line each year. Its structure encourages workforce participation by increasing in value with earned income until reaching a plateau, after which it gradually phases out.

Overview

The credit functions as a central component of the American welfare state, specifically targeting households with earned income from employment or self-employment. Unlike many social programs administered by the Department of Health and Human Services, it is delivered through the federal tax system. The policy has received bipartisan support over decades, with expansions often signed by presidents from both major parties, including Ronald Reagan, Bill Clinton, and Barack Obama. Its primary goals are poverty alleviation and providing an incentive for labor force entry, particularly for single parents.

Eligibility requirements

Eligibility is determined by several key factors including filing status, adjusted gross income, and the presence of qualifying children. Taxpayers must have a valid Social Security number and cannot file using the status of married filing separately. Investment income must remain below a threshold set annually by the Internal Revenue Service. The definition of a qualifying child follows specific tests for relationship, age, and residency, similar to rules for the Child Tax Credit. Importantly, individuals without children may also qualify, though the credit amount is substantially smaller.

Calculation of credit amount

The credit amount is calculated based on earned income and the number of qualifying children, using tables and worksheets provided by the Internal Revenue Service. The credit increases with each additional dollar of earnings until reaching a maximum value, then remains constant across a plateau before phasing out as income rises further. These income thresholds and credit maximums are adjusted annually for inflation by the IRS. The precise calculation involves consulting the annual Publication 596 and can be facilitated by professional tax preparers or software like TurboTax.

Claiming the credit

To claim the credit, eligible taxpayers must file a federal income tax return, even if no tax is owed, and complete Schedule EIC. The Internal Revenue Service recommends using its Free File program or seeking assistance from the Volunteer Income Tax Assistance program. Due to its refundable nature, the credit can result in a payment to the taxpayer that exceeds their tax liability. The IRS rigorously audits claims to prevent fraud, a process supported by provisions in laws like the Taxpayer Relief Act of 1997.

Impact and effectiveness

Studies by institutions like the Brookings Institution and the Center on Budget and Policy Priorities consistently find it is one of the most effective anti-poverty tools in the United States]. It lifts more children out of poverty than any other single program, reducing the severity of child poverty. Research also indicates positive effects on infant health outcomes and children's educational performance. Critics, including some members of the House Ways and Means Committee, argue it can create a "marriage penalty" and may have high improper payment rates, though recent IRS compliance efforts have aimed to address the latter.

History and legislative changes

The credit was originally established by the Tax Reduction Act of 1975, signed by President Gerald Ford, as a temporary measure. It was made permanent under the Revenue Act of 1978. Major expansions occurred through the Tax Reform Act of 1986 under Ronald Reagan and the Omnibus Budget Reconciliation Act of 1993 under Bill Clinton. The Economic Growth and Tax Relief Reconciliation Act of 2001 and subsequent acts under George W. Bush increased benefits for married couples. The American Recovery and Reinvestment Act of 2009 under Barack Obama temporarily enhanced the credit for larger families, with some provisions later made permanent by the Protecting Americans from Tax Hikes Act.

Category:Tax credits in the United States Category:Social programs in the United States