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[IWS] CRS: THE EARNED INCOME TAX CREDIT (EITC): AN OVERVIEW [3 December 2014]

IWS Documented News Service

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Institute for Workplace Studies-----------------Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor--------------------Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

The Earned Income Tax Credit (EITC): An Overview

Gene Falk, Specialist in Social Policy

Margot L. Crandall-Hollick, Analyst in Public Finance

December 3, 2014

http://www.fas.org/sgp/crs/misc/R43805.pdf

[full-text, 28 pages]

 

Summary

The Earned Income Tax Credit (EITC) is a refundable tax credit available to eligible workers

earning relatively low wages. Because the credit is refundable, an EITC recipient need not owe

taxes to receive the benefit. Eligibility for and the amount of the EITC are based on a variety of

factors, including residence and taxpayer ID requirements, the presence of qualifying children,

age requirements for childless recipients, and the recipient’s investment income and earned

income. Tax filers with income above certain thresholds—these thresholds are based on marital

status and number of qualifying children—are ineligible for the credit.

 

The EITC varies based on a recipient’s earnings. Specifically, the EITC equals a fixed percentage

(the “credit rate”) of earned income until the credit amount reaches its maximum level. The EITC

then remains at its maximum level over a subsequent range of earned income, between the

“earned income amount” and the “phase-out amount threshold.” Finally, the credit gradually

decreases to zero at a fixed rate (the “phase-out rate”) for each additional dollar of adjusted gross

income (AGI) (or earnings, whichever is greater) above the phase-out amount threshold. The

specific values of these EITC parameters (e.g., credit rate, earned income amount) vary

depending on several factors, including the number of qualifying children a tax filer has and his

or her marital status. For 2014, the maximum EITC for a tax filer without children is $496 per

year. In contrast, the 2014 maximum EITC for a tax filer with one child is $3,305 per year; for

two children, $5,460 per year; and for three or more children, $6,143 per year.

 

The EITC is provided to individuals and families once a year, in a lump sum payment after

individuals and families file their federal income tax return. The credit may be received in one of

three ways: (1) a reduction in federal tax liability; (2) a refund from the Treasury if the tax filer

has no income tax liability; or (3) a combination of a reduced federal tax liability and a refund.

The amount of the credit a tax filer receives is based on the prior year’s income, earnings, and

family composition (marital status and number of qualifying children). That is, the EITC paid in

2015 will be based on factors from 2014.

 

The EITC cannot be counted as income in determining eligibility for or the amount of any

federally funded public benefit program. An EITC refund that is saved by a tax filer does not

count against the resource limits of any federally funded public benefit program for 12

months after the refund is received.

 

In 2012, a total of $64.1 billion was claimed by 27.8 million tax filers (19% of all tax filers),

making the EITC the largest need-tested anti-poverty cash assistance program. In that year, 97%

of all EITC dollars were claimed by families with children. However, there was considerable

variation in the share of returns claiming the EITC by state, with a greater share filed in certain

southern states compared to other regions of the country.

 

Contents

Introduction ...................................................................................................................................... 1

Eligibility for the EITC .................................................................................................................... 1

Filing a Federal Income Tax Return .......................................................................................... 2

Earned Income ........................................................................................................................... 2

Residency and Identification Requirements .............................................................................. 3

Qualifying Children ................................................................................................................... 3

Age Requirements for EITC Recipients with No Qualifying Children ..................................... 4

Investment Income .................................................................................................................... 4

Disallowance of the EITC Due to Fraud or Reckless Disregard of Rules ................................. 4

Calculating the EITC ....................................................................................................................... 4

Income Limits for the EITC ...................................................................................................... 7

Payment of the EITC ....................................................................................................................... 8

Interaction with Other Tax Provisions ....................................................................................... 9

Treatment of the EITC for Need-Tested Benefit Programs ..................................................... 10

Modifications to the EITC Set to Expire ....................................................................................... 10

Participation and Benefits .............................................................................................................. 11

Trends in Participation and EITC Benefits .............................................................................. 11

Participation and EITC Amounts Claimed for 2012................................................................ 13

Number of Qualifying Children ........................................................................................ 14

Income Level ..................................................................................................................... 16

Filing and Marital Status ................................................................................................... 17

Region ............................................................................................................................... 18

 

Figures

Figure 1. Maximum EITC by Number of Qualifying Children: 2014 ............................................. 5

Figure 2. Amount of the EITC for an Unmarried Tax Filer with One Child, 2014 ......................... 7

Figure 3. Number of Tax Filers Claiming the EITC: 1975 to 2012 ............................................... 12

Figure 4. EITC Claimed on Federal Income Tax Returns: 1975-2012 .......................................... 12

Figure 5. Average EITC Claimed: 1975 to 2012 ........................................................................... 13

Figure 6. Total EITC Dollars Claimed for 2012, by Number of Qualifying Children................... 14

Figure 7. Number of Tax Returns with EITC Claims for 2012, by Number of Qualifying Children ...................................... 15

Figure 8. Average EITC Claimed by Tax Filers in 2012, by Number of Qualifying Children ........................................... 15

Figure 9. Number of Returns Claiming the EITC and Average EITC Claimed for 2012, by Adjusted Gross Income ................. 17

Figure 10. Estimate of EITC Dollars Claimed by Marital Status, 2015 ........................................ 18

Figure 11. Percentage of Tax Returns Claiming the EITC by State, 2012 ..................................... 19

 

Tables

Table 1. EITC Tax Parameters by Marital Status and Number of Qualifying Children for 2014 ................................................. 5

Table 2. Maximum AGI to Qualify for the EITC, by Number of Qualifying Children and Filing Status in 2014 ..................................... 8

Table A-1. EITC Tax Filers and Dollars Claimed: 1975-2012 ...................................................... 20

Table A-2. Average EITC, Number of Returns with EITC Claimed, and Total EITC Benefits for 2012, by Adjusted Gross Income ........................... 21

Table A-3. Total EITC Returns and Amounts for 2012, by State ................................................... 23

 

Appendixes

Appendix. Additional Tables ......................................................................................................... 20

 

Contacts

Author Contact Information........................................................................................................... 24

Acknowledgments ......................................................................................................................... 24

 

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This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

 

 

 

 

 

 

 

 

 




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