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Sunday, December 12, 2010

The Earned Income Tax Credit (EITC): An Overview

Christine Scott
Specialist in Social Policy

The Earned Income Tax Credit (EITC or EIC) began in 1975 as a temporary program to return a portion of the Social Security tax paid by lower income taxpayers, and was made permanent in 1978. In the 1990s, the program became a major component of federal efforts to reduce poverty, and is now the largest anti-poverty cash entitlement program. Childless adults in 2008 (the latest year for which data are available) received an average EITC of $252, families with one child received an average EITC of $1,996, and families with two or more children received an average EITC of $3,105.

A low-income worker must file an annual income tax return to receive the EITC and meet certain requirements for income and age. A tax filer cannot be a dependent of another tax filer and must be a resident of the United States unless overseas because of military duty. The EITC is based on income and whether the tax filer has a qualifying child.

The EITC interacts with several nonrefundable federal tax credits to the extent lower income workers can utilize the credits to reduce tax liability before the EITC. Income from the credit is not used to determine eligibility or benefits for means tested programs. However, 23 states and the District of Columbia now offer an EITC for state taxes, and most of them are based on the federal EITC. Any change in the federal EITC would flow down to impact the state EITC.

Policy issues for the EITC, which reflect either the structure, impact, or administration of the credit include the work incentive effects of the credit; the marriage penalty for couples filing joint tax returns; the anti-poverty effectiveness of the credit (primarily a family size issue); and potential abuse (i.e., compliance with credit law and regulations).

In addition, the changes to the credit made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-116) will expire on December 31, 2010. On December 3, 2010, the House passed H.R. 4853, the Middle Class Tax Relief Act of 2010, which would permanently extend the expiring tax provisions enacted under EGTRRA. The bill has been sent to the Senate for consideration. These provisions include (1) a simplified definition of earned income; (2) a simplified relationship test; (3) a simplified tie-breaking rule; (4) additional math error authority for the Internal Revenue Service; (5) a repeal of prior-law provisions that reduced an individual’s EITC by the amount of his or her alternative minimum tax liability; and (6) increases in the beginning and ending points of the credit phase-out for married taxpayers by $5,000.

Date of Report: December 3, 2010
Number of Pages: 32
Order Number: RL31768
Price: $29.95

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