The Earned Income Tax Credit (EITC) is a tax credit that is designed to provide tax relief to low-to-moderate income working families. The EITC was created in 1975 as a part of the Tax Reduction Act and has been expanded several times since then. The credit is based on the taxpayer’s income and the number of qualifying children in his or her household. It is refundable, which means that if the credit exceeds the taxpayer’s tax liability, the excess amount is paid to the taxpayer as a refund. In this article, we will explore the details of the EITC policy, including its evolution, eligibility criteria, and impact on low-income families.
Overview of the EITC Policy
The EITC is a federal tax credit that is administered by the Internal Revenue Service (IRS). The credit is available to taxpayers who earn income from an employer, self-employment, or certain other sources. The credit is calculated based on the taxpayer’s earned income, which includes wages, salaries, and self-employment income, as well as other qualifying income.
The EITC is designed to be progressive, meaning that it provides more significant tax relief to low-income taxpayers than to higher-income taxpayers. The maximum credit amount is adjusted annually to account for inflation. In 2021, the maximum credit amount for tax year 2020 was $6,660 for taxpayers with three or more qualifying children, $5,920 for taxpayers with two qualifying children, $3,584 for taxpayers with one qualifying child, and $538 for taxpayers with no qualifying children.
Evolution of the EITC Policy
Since its introduction in 1975, the EITC has undergone several changes and expansions. The biggest expansion of the EITC took place in 1993 when the Clinton administration increased the credit amount and expanded the eligibility criteria to include more working families. The credit was also made refundable, as previously it could only reduce tax liability and was not refundable. In 2009, the American Recovery and Reinvestment Act temporarily expanded the EITC to provide additional relief to families struggling during the recession.
In recent years, there have been proposals to further expand the EITC. In 2021, President Biden proposed to expand the EITC to more than two million additional low-income workers and increase the credit amount for eligible families with children, particularly those with young children.
Eligibility for the EITC
To qualify for the EITC, a taxpayer must meet several criteria related to income, age, and family status. The rules for determining eligibility can be complex and depend on the taxpayer’s specific circumstances. The following is a summary of the general eligibility criteria:
– Earned Income: The taxpayer must have earned income from an employer, self-employment, or other qualifying sources.
– Filing Status: The taxpayer must file a tax return, either as single, head of household, married filing jointly, or qualifying widow(er) with a dependent child.
– Age: The taxpayer must be between the ages of 25 and 65, unless the taxpayer is a qualified childless worker, in which case, there is no age limit.
– Family Status: The taxpayer must have a qualifying child or be a qualified childless worker.
– Citizenship: The taxpayer, spouse, and qualifying children must have valid Social Security numbers and must be U.S. citizens, resident aliens, or nonresident aliens married to U.S. citizens or resident aliens.
The requirements for a qualifying child are as follows:
– Relationship: The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them.
– Age: The child must be under the age of 19 at the end of the tax year or under the age of 24 if a full-time student for at least five months of the year. There is no age limit for a child who is permanently and totally disabled.
– Residency: The child must have lived with the taxpayer in the United States for more than half of the year.
– Support: The child must not have provided more than half of his or her support during the tax year.
For a taxpayer without a qualifying child, the following requirements must be met:
– Age: The taxpayer must be between the ages of 25 and 65 (no age limit for qualifying widows or widowers).
– Income: The taxpayer’s earned income must be below the income limit for the tax year.
– Dependency: The taxpayer cannot be claimed as a dependent on another taxpayer’s tax return.
Impact of the EITC on Low-Income Families
The EITC has become one of the most effective anti-poverty programs in America. According to the Center on Budget and Policy Priorities, the EITC lifted 5.8 million people out of poverty in 2019, including 2.9 million children. The credit also reduced the poverty rate for children by 25%, making it one of the most effective tools for combating child poverty.
The EITC is especially important for low-income families because it provides a cash infusion at a time when it is needed the most. Many families use the credit to pay for rent, utilities, food, and other essential expenses. Since the credit is refundable, it provides a financial boost to families who may not have a tax liability but still struggle to make ends meet.
Furthermore, the EITC has been shown to have positive long-term effects on children. Children from families who receive the EITC are more likely to graduate from high school, attend college, and earn higher wages as adults. These benefits are especially significant for children who grow up in poverty, as the EITC can provide a pathway out of poverty for future generations.
The Earned Income Tax Credit (EITC) is a federal tax credit that provides tax relief to low-to-moderate income working families. The credit is designed to be progressive, meaning that it provides more significant tax relief to low-income taxpayers than to higher-income taxpayers. The EITC has undergone several changes and expansions since its introduction in 1975 and has become one of the most effective anti-poverty programs in America. The credit is especially important for low-income families because it provides a cash infusion at a time when it is needed the most. The EITC has positive long-term effects on children, providing a pathway out of poverty for future generations.
The Earned Income Tax Credit was first created in 1975. It is an important part of the United States government’s income tax credit policy and has undergone many revisions and strengthening measures since its original passage. In terms of the overall field of income tax credits, this provision is considered to be “means tested,” which refers to the fact that it will be provided to taxpayers pending the finding that their means entitle them to receive it.
This finding usually consists of an evaluation of a person or family’s financial situation. In this sense, the Earned Income Tax Credit has been a major part of the United States government’s anti-poverty policy and has been periodically resurrected by American politicians in order to demonstrate their commitment to working-class constituents.
In a prominent example of this kind of politicized treatment of income tax credits, the provision for Earned Income Tax Credits was extended in 1987 under the Reagan Administration, with later prominent reforms to the program coming in 1990, 1993 and 2001. Earned income tax credits can also be instituted on a state or municipal level. In the case of the former, by 2006 twenty states were found to have an earned income tax credit policy on the books.
These qualifications addressed by the Earned Income Tax Credit include various aspects of an United States citizen or resident alien’s financial straits, family situation, living arrangements, and “age” (as pertains more to reasonable expectations as to an individual’s ability to provide for his or her well-being than to the actual period for which a person has been alive). As to the last point, the finding that a citizen or resident is disabled in some way can be applied to income tax credits.
If the family situation is being claimed as a qualification for an Earned Income Tax Credit, then the applicable offspring of the taxpayer must be either genetically or legally related to her or him, and the residence of the child and parent must have been living together for at least one day and six months, excluding non-permanent interruptions and absences due to military service. Taxpayers who do not have offspring either by biology or adoption must be no more than sixty-five years old and no less than twenty-five years old.
The kinds of income which are considered to fall under the purview of the Earned Income Tax Credit are specified for the purpose of the IRS by American tax code, which defines “earned income.” The kind of earnings which can be considered “earned income” are thus specified to include the pay acquired by workers, such as from salaries, gratuities, and other common sources, the net income of a person working for herself, money given to a person on disability, the gross amount of pay received by an employee under a statute, and the salary of a member of the United States military, which may be either included in its entirety or excluded entirely from consideration as an Earned Income Tax Credit.