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Article updated to reflect recent changes in legislation and the current political climate at the state and federal levels. Includes information on the impact of the EITC on low-income families.

Updated on 02 Dec 2013. The previous version of this content can be found here.
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Earned Income Tax Credit

Abstract and Keywords

The federal Earned Income Tax Credit (EITC) is a refundable tax credit for working families with low and moderate incomes. The credit provides a substantial income supplement to families with children and thus helps families finance basic necessities or invest in longer-term household development. In recent years, political support for the EITC has declined. Social workers should be prepared to advocate against policy changes that would reduce the impact of the EITC. Social workers could also support EITC outreach campaigns and advocate for more and expanded state EITCs.

Keywords: advocacy, Earned Income Tax Credit, economic well-being, EITC, low income, policy, poverty

The federal Earned Income Tax Credit (EITC) is a tax credit for working families with low and moderate incomes. The federal Earned Income Tax Credit (EITC) is a tax credit for working families with low and moderate incomes. The credit is administered by the Internal Revenue Service (IRS); families receive it by filing their regular tax returns and completing the seven-line Schedule EIC. The EITC is refundable, which means that eligible individuals and families receive payments even if they do not owe federal income taxes. This characteristic is crucial because low-income families who pay little or no federal income tax do not benefit from nonrefundable credits. During the 2009 tax year, the average EITC was $2,770 for a family with children and $259 for a family without children (Center on Budget and Policy Priorities [CBPP], 2012). In tax year 2010, over 26 million tax filers—about 17% of all tax filers—claimed the EITC and received about $55 billion in benefits (Tax Policy Center, n.d.). In recent years, political support for the EITC has declined. Social workers should be prepared to advocate against policy changes that would reduce the impact of the EITC. Social workers could also support EITC outreach campaigns and advocate for more and expanded state EITCs.

History and Structure

The EITC was created in 1975 to offset the burden of payroll taxes for low-income working people with children (Hotz & Scholz, 2003). At that time, the credit equaled 10% of earned income, and the maximum value was $400 (equivalent to about $1,700 in 2012). From the mid-1980s to the 1990s, there was strong bipartisan support for the EITC, and major expansions of the credit were enacted in 1986, 1990, 1993, and 2001. These expansions indexed the credit to inflation, increased benefits (especially for families with multiple children and later for married couples with children), created a small credit for childless working families, and simplified eligibility criteria.

EITC benefits vary with earnings in a somewhat complex way (Table 1). The credit has a “phase-in range,” a “plateau range,” and a “phase-out range.” The phase-in range occurs at low levels of earnings, and the value of the credit increases with earnings. For example, in the 2012 tax year, working families with two children and earnings at or below $13,090 were eligible for an EITC equal to 40% of their earnings. In the plateau range, EITC benefits remain at their maximum values, despite increases in earnings. For the 2012 tax year, married couples (filing jointly) with two children and earnings between $13,090 and $22,300 were eligible for the maximum benefit of $5,236. Finally, during the phase-out range, benefits are reduced and ultimately eliminated. In 2012, the benefit for married couples with two children was reduced by 21 cents for every dollar of income earned above $22,300 and was completely phased out when earnings exceeded $47,162.

The American Economic Recovery Act of 2009 temporarily expanded the EITC by adding a “third tier” of the EITC for families with three or more children and making these families eligible for larger refunds. In 2012, the maximum credit for these larger families was $655 more than it would have been without this expansion. Additionally, the Recovery Act reduced the financial penalty some couples experience when they marry by allowing married couples to receive larger benefits. These provisions were scheduled to expire at the end of 2010 but Congress extended them through 2012.

In 2010, an option allowing tax filers to receive advanced payment of their EITC was repealed. Some advocates lamented this as removing a valuable tool to help low-income families smooth consumption and cope with mid-year budget shortfalls. In practice, however, fewer than 2% of EITC filers chose the advance payment, largely because of concerns that they would owe the government money if they miscalculated the size of their refund (Tax Policy Center, n.d.).

Effects on Poverty, Consumption, Investment, and Employment

As shown in Table 1, benefits for families with children can be substantial. Spread throughout the year, the maximum credit for a family with two children in tax year 2012 was equivalent to $101 a week. Although higher-income families that do not qualify for any other means-tested assistance may receive the EITC, working families with children and with incomes just below the poverty line receive the largest EITC benefit. This arrangement makes the EITC very effective in reducing poverty among children. In 2010, the EITC lifted about 6.3 million people out of poverty, including about 3.3 million children. Without the EITC, the number of children living in poverty would have been one-quarter higher (CBPP, 2012).

Evidence from several small studies shows that families use tax refunds (which may include overwithholding and EITC payments) to catch up on bills and to purchase necessities (Romich & Weisner, 2000; Smeeding, Phillips, & O’Connor, 2000). Small studies also show that some families use tax refunds to save, to purchase or repair cars and homes, to reduce debt, and to pay for education expenses (Beverly, Romich, & Tescher, 2003; Beverly, Schneider, & Tufano, 2006; Romich & Weisner, 2000; Smeeding et al., 2000). These uses of tax refunds may contribute to longer-term household development. In addition, a fairly large body of research suggests that the EITC increases employment among single mothers (for example, see the summaries in Eissa & Hoynes, 2006; Hotz & Scholz, 2003). At the same time, there is evidence that the federal EITC reduces employment among married mothers (see, for example, Eissa & Hoynes, 2004).

Advocacy Opportunities

In sum, the federal EITC provides a substantial income supplement to families with children and thus helps families finance basic necessities or invest in longer-term household development. The credit appears to encourage work by single mothers—an outcome that appeals to proponents of welfare reform. Because the transfer occurs through the tax system, it is presumably less stigmatizing and less expensive to administer than other means-tested transfers. Finally, the credit may be viewed as an entitlement because benefits are not subject to time limits. These characteristics make the EITC a valuable tool for supporting low-income working families (Beverly, 2002).

Social workers should remain watchful and be prepared to advocate against policy changes that would reduce the impact of the EITC. In recent years, political support for the EITC has declined somewhat. In 2011, the IRS reported that about a quarter of EITC claims ($11 to 13 billion per year) are paid in error, primarily due to confusion sparked by the complex structure of the credit and due to misreporting of income by tax filers claiming the credit (Treasury Inspector General for Tax Administration, 2012). These error rates fuel concerns about EITC “fraud.” Some observers and advocates point to methodological problems that may cause EITC overpayments to be overstated. Importantly, more than 70% of EITC claims are submitted by commercial tax preparers, and this prompted the IRS to initiate a major enforcement effort targeting errors by commercial preparers (Greenstein & Wancheck, 2011).

Deficit-reduction pressures also contribute to calls to reduce or even eliminate the EITC. And, some are concerned that EITC recipients stop working when their earnings reach the phase-out range (because additional earnings bring about a loss of EITC benefits). This concern that the EITC phase-out process inhibits work effort prompted congressional hearings on proposals to revise the EITC in the spring of 2012. Advocacy will be needed to preserve the EITC and articulate its demonstrated positive effects on children’s economic security and on the labor participation of single mothers.

Social workers could also support EITC outreach campaigns. Studies suggest that at least half of those eligible for the EITC fail to claim the credit, with participation varying by education, participation in other means-tested programs, and other key demographics (Caputo, 2005). Because many social workers are connected to organizations that serve low- and moderate-income families, they are well-positioned to participate in and even lead outreach efforts. Social workers and social work agencies could, for example, ask about tax filing status during intake, and could prioritize outreach efforts to those who are less likely to be aware of the EITC (Caputo, 2010). The National Earned Income Tax Credit Outreach Campaign (http://eitcoutreach.org/) offers outreach kits, and Brooks, Russell, and Fisher (2006) describe and evaluate one outreach model.

Social workers might also advocate for more and expanded state earned income tax credits. This entry focuses on the federal EITC, but as of June 2012, 25 states had state credits. These state credits typically use federal eligibility rules and are usually computed as a percentage of the federal credit (Nagle & Johnson, 2006). Thus, they are easy to administer. State credits tend to be quite small, however—sometimes only 4 or 5% of the federal credit (Nagle & Johnson, 2006). Social workers in states without credits can work to create state credits, and those in states with existing credits can advocate for increases. Nagle and Johnson offer concrete suggestions for designing and enacting state credits. Here, too, defensive advocacy is needed. State legislatures and administrations have threatened EITCs in several states, and some states have reduced their EITCs (Guzman, 2012).

Finally, social workers could help create programs and policies that encourage saving out of tax refunds. Existing initiatives, which are grounded in the asset-building movement, have allowed refund recipients to open low-cost bank accounts with their refunds, encouraged direct deposit into restricted savings vehicles, and allowed refund recipients to “split” their refunds, designating some for savings and some for consumption (Beverly & Dailey, 2003; Beverly et al., 2003; Beverly et al., 2006; Lim, Livermore, & Creel Davis, 2010).

Table 1 2012 Federal Earned Income Tax Credit Parameters

Number of children

Phase-in range (earnings)

Phase-in rate

Maximum benefit

Phase-out range (earnings)

Phase-out rate

Three or more

At or below $13,090

45.00%

$5,891

Married: $22,300–50,270

21.06%

Not married: $17,090–45,060

Two

At or below $13,090

40.00%

$5,236

Married: $22,300–47,162

21.06%

Not married: $17,090–41,952

One

At or below $9,320

34.00%

$3,169

Married: $22,300–42,130

15.98%

Not married: $17,090–36,920

None

At or below $6,210

7.65%

$475

Married: $12,980–19,190

7.65%

Not married: $7,770–13,980

Source: Tax Policy Center, n.d.

References

Beverly S. G. (2002). What social workers need to know about the earned income tax Credit. Social Work, 47(3), 259–266.Find this resource:

    Beverly, S. G., & Dailey, C. (2003). Using tax refunds to promote asset building in low-income households: Program and policy options (Policy Report). St. Louis, MO: Washington University in St. Louis, Center for Social Development.Find this resource:

      Beverly, S. G., Romich, J. L., & Tescher, J. (2003). Linking tax refunds and low-cost bank accounts: A social development strategy for low-income families? Social Development Issues, 25(1/2), 235–246.Find this resource:

        Beverly, S. G., Schneider, D., & Tufano, P. (2006). Splitting tax refunds and building savings: An empirical test. In J. M. Poterba (Ed.), Tax policy and the economy. Cambridge, MA: National Bureau of Economic Research and MIT Press.Find this resource:

          Brooks, F., Russell, D., & Fisher, R. (2006). ACORN’s Accelerated Income Redistribution project: A program evaluation. Research on Social Work Practice, 16(4), 369–381.Find this resource:

            Caputo, R. K. (2005). The earned income tax credit: A study of eligible participants v. non-participants. Journal of Sociology and Social Welfare, 33(1), 9–29.Find this resource:

              Caputo, R. K. (2010). Prevalence and patterns of earned income tax credit use among eligible tax-filing families: A panel study, 1999–2005. Families in Society, 91(1), 8–15.Find this resource:

                Center on Budget and Policy Priorities (CBPP). (2012, February). Policy: The earned income tax credit. Washington, DC: Author.Find this resource:

                  Eissa, N., & Hoynes, H. (2004). Taxes and the labor market participation of married couples: The earned income tax credit. Journal of Public Economics, 88(9–10), 1931–1958.Find this resource:

                    Eissa, N., & Hoynes, H. (2006). Behavioral responses to taxes: Lessons from the EITC and labor supply. In J. M. Poterba (Ed.), Tax policy and the economy (Vol. 20). Cambridge, MA: National Bureau of Economic Research and MIT Press.Find this resource:

                      Greenstein, R., & Wancheck, J. (2011). Earned income tax credit overpayment and error issues. Washington, DC: Center on Budget and Policy Priorities.Find this resource:

                        Guzman, E. (2012). EITC gains and losses: A 2012 legislative update. Washington, DC: Corporation for Enterprise Development.Find this resource:

                          Hotz, V. J., & Scholz, J. K. (2003). The earned income tax credit. In R. A. Moffit (Ed.), Means-tested transfer programs in the United States. Chicago, IL: The University of Chicago Press.Find this resource:

                            Lim, Y., Livermore, M., & Creel Davis, B. (2010). Material hardship among banked and unbanked earned income tax credit-eligible families. Journal of Poverty, 14, 266–284.Find this resource:

                              Nagle, A., & Johnson, N. (2006). A hand up: How state earned income tax credits help working families escape poverty in 2006. Washington, DC: Center on Budget and Policy Priorities.Find this resource:

                                Romich, J. L., & Weisner, T. (2000). How families view and use the EITC: Advance payment versus lump sum delivery. National Tax Journal, 53(4, Part 2), 1245–1265.Find this resource:

                                  Smeeding, T. M., Phillips, K. R., & O’Connor, M. (2000). The earned income tax credit: Expectation, knowledge, use, and economic and social mobility. National Tax Journal, 53(4, Pt. 2), 1187–1209.Find this resource:

                                    Tax Policy Center. (n.d.). Taxation and the family: What is the earned income tax credit? Washington, DC: Author. Retrieved October 4, 2012, from http://www.taxpolicycenter.org/briefing-book/key-elements/family/eitc.cfmFind this resource:

                                      Treasury Inspector General for Tax Administration. (2012, March). The Internal Revenue Service is not in compliance with all improper payments elimination and recovery act requirements. Washington, DC: Author.Find this resource: