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How the Earned Income Tax Credit Lifts Families From Poverty

One of the federal government’s biggest, if often overlooked, anti-poverty programs is the Earned Income Tax Credit, or EITC. As tax season comes to a close, there is still time to take a look at how the EITC works, who can benefit from this program and why some experts think it should be expanded. 

All of this information is useful for future tax filings. Even if you missed out on filing for the EITC in previous years, or didn’t file taxes at all, you can still apply for this credit back to tax year 2014.

3 Takeaways on the EITC

  • Where can I find more information about qualifying, federally, and for past years? The IRS has answers: Qualifying and filing for previous years, as well as when to expect a refund, if you qualify.   
  • Do states and cities offer the EITC? Yes. Two dozen states, plus New York City and Washington, D.C., offer tax credits for qualifying workers. The majority are refundable, meaning the government will pay credit in excess of the taxpayer’s liability. The IRS publishes a list of state and local EITC policies.
  • Does anyone provide free tax preparation assistance? Yes. The IRS Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs provide free assistance to those who qualify. The IRS has a directory for people to contact a provider.

Though it’s formally called a credit, the EITC is a tax refund that puts extra money in the pockets of lower-income working families and individuals, particularly those raising children. “The EITC is set out to encourage work, and also boost the earnings of low-income workers,” says Hunter Blair, a budget analyst with Economic Policy Institute, a progressive think tank.

“It incentivizes people who are low-income workers to work more hours, and incentivizes people who are not in the labor force to enter the labor force.”

In 2017, 27 million eligible workers and families nationwide received about $65 billion in tax credits under the EITC. The federal government estimates these working family tax credits lifted 9.4 million people out of poverty, including 5 million children.

The maximum amount of credit you can claim for tax year 2017 is: $6,318 with three or more qualifying children, $5,616 with two qualifying children, $3,400 with one qualifying child or $510 with no qualifying children.

If the EITC amount for which you qualify is greater than your total tax liability, the government pays the difference back to you. Depending on what a family earns in a year and its number of members, the tax refund can be up to about 13 percent of the household income. 

Here’s how it works. For a single working parent with two children, for example, the first dollar earned in the tax year is credited 40 cents under the EITC, up until the first $14,040 of annual income. After that, additional earnings don’t reduce your credit, until you hit $18,340 in annual income. At that point, each additional dollar earned reduces your credit by about 21 cents, until the credit zeros out at income greater than $45,007.

One of the trickiest parts of the EITC for the tax filer is determining who qualifies as a dependent child under the program. For anyone claiming dependent children under the program, the IRS requires Schedule EIC, which walks you through determining who qualifies. A critical point is that the child must have lived with you for more than six months of the year, even if you paid most of the child’s living expenses.

Federal EITC: Credit Amounts and Income Limits

  • Maximum credit: $510. For who? Households with no qualifying child and with a single filer (including head of household or widowed) earning $15,010 annually or a married couple, filing jointly, and earning $20,600 annually.    
  • Maximum credit: $3,400. For who? Households with one qualifying child and a single filer earning $39,617 annually or a married couple, filing jointly, and earning $45,207 annually. 
  • Maximum credit: $5,616. For who? Households with two qualifying children and a single filer earning $45,007 annually or a married couple, filing jointly, and earning $50,597 annually.  
  • Maximum credit: $6,318. For who? Households with three or more qualifying children and a single filer earning $48,340 annually or a married couple, filing jointly, and earning $53,930 annually. 

— Internal Revenue Service

Although the EITC has received wide bipartisan support as an anti-poverty measure since it was first rolled out in 1975, economists have fiercely debated whether raising the minimum wage or expanding the EITC would better help boost low-income workers’ earnings and attract them to the labor force.

That’s a false dichotomy, though, argues Blair, the EPI budget analyst. “It’s a really interesting debate. One of the things about the EITC is that, because it increases the labor supply, it has the unintended effect of pushing down wages… Part of the benefit is captured by employers,” he says.

“It has a particularly damaging effect for childless adults, because they are working for the same employers as workers with children but are not seeing the same benefit from the EITC.”

Instead of viewing higher minimum wages and the EITC as competing anti-poverty strategies, they should be looked at as complementary, Blair argues. That is, the EITC to boost labor participation, and a higher minimum wage to prevent a robust labor supply from depressing wages.

One of the key criticisms of the EITC is how tilted it is in favor of low-income workers with children, as opposed to childless workers, who qualify for a maximum credit of just $510. A childless married couple filing jointly had to make less than $20,600 to qualify for any refund under the EITC in 2017.

“There has been, in the past at least, bipartisan claims that it’s something important to be doing something toward increasing the EITC for childless workers,” Blair says. “But if we look at the recent tax bill it certainly didn’t show up there.”

For low-income workers, the good news about the recent tax bill is that at least the EITC wasn’t cut, even if it was not expanded. The income limits and maximum credit amounts increase by inflation each year, and the IRS has already published those amounts for tax year 2018.

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Equal Voice is Marguerite Casey Foundation’s publication featuring stories of America’s families creating social change. With Equal Voice, we challenge how people think and talk about poverty in America. Keith Griffith is a freelance journalist in New York City. About the top image: A Hmong family in Fresno, California is seen in 2013. Photo by Mike Kane for Marguerite Casey Foundation. Equal Voice content – articles, photos and videos – can be reproduced for free, as long as proper credit and a link to our homepage are included. 

2018 © Equal Voice for America’s Families

Published by Marguerite Casey Foundation

 


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