Earned Income Credit Who Qualifies – The Earned Income Tax Credit (EITC) boosts the incomes of low-wage workers and offsets some of the taxes they pay, giving low-income families a chance to move toward significant economic security. The federal EITC has lifted millions of Americans out of poverty since it was enacted in the mid-1970s. Over the past several decades, the EITC has become more effective as many states have adopted and expanded their credits.
The EITC benefits low-income people of all races and ethnicities. This is particularly beneficial in historically marginalized black and Hispanic communities where labor market discrimination, inequitable education systems, and countless other inequities have forced a disproportionate share of people into low-wage jobs.
Earned Income Credit Who Qualifies
The effects of the EITC have been studied for decades, and studies consistently show that children whose families receive the loan graduate from high school, go to college, and find jobs as adults.
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In addition to increasing the financial security of working families with children, the EITC improves health and is linked to a reduction in the number of low-birth-weight babies.
As our nation faces economic uncertainty, proven and effective income supports like the EITC remain more important than ever. Even in times of economic growth, too many workers face low and slowly growing wages while feeling the squeeze from rising costs for food, housing, childcare and other basic household expenses. Worse, in 46 states, low-income households pay a larger share of their income in state and local taxes than the wealthiest households.
This leaves working families with even fewer resources to make ends meet, contributing to ever-growing income and wealth inequality. Creating or expanding the state EITC could address this inequity in most state tax codes.
The federal EITC has been boosting the incomes of low-wage workers since 1975. Lawmakers have improved the credit over time so more working families are in a better position to put food on the table, pay their bills and maintain economic stability.
Child Tax Credit Definition
Last year, the American Rescue Plan Act temporarily increased the federal EITC for low-wage workers without children at home and made it more widely available by expanding the age and income limits. Those important extensions expired on January 1, 2022, but some members of Congress want those improvements revived.
The federal EITC delivered about $60 billion in 2021 to 25 million working families and individuals through claims on their 2020 tax returns.
Often used as a source of temporary support, the EITC helps millions of families each year. Combined with the expanded federal EITC and enhanced federal Child Tax Credit (CTC), it lifted an estimated 5.3 million people out of poverty in 2021.
The EITC is based on earned income, such as wages and salaries. For example, in 2022, for every dollar earned up to $15,410, families with three or more children would receive a tax credit equal to 45 percent of that income, up to a maximum of $6,935. Increasing the income of low- and moderate-income workers, income restrictions limit credit eligibility. Families continue to be eligible for the maximum loan until their income reaches 20,140 household heads. Above this level, the cost of the loan gradually decreases to zero and is not available once the household’s income exceeds the maximum eligibility level. Single-parent families with three or more children earning $53,070 or more per year are also ineligible, as are married couples earning $59,200 or more. Absent recent federal action to revive EITC enhancements, the credit will remain much more generous and available to fewer workers without children at home: the maximum credit for such workers is just $560, about one-third of the population. 2021 is the result of improvement.
How To Calculate Earned Income For The ‘lookback’ Rule
In addition to helping working families afford child care, health care, housing, food, and other necessities, state EITCs help improve the equity of state and local tax systems. Unlike federal taxes, state and local taxes are generally regressive, requiring low- and moderate-income families to pay a larger portion of their income in taxes than wealthier taxpayers. The poorest 20 percent of Americans pay 11.4 percent of their income in state and local taxes. In contrast, middle-income taxpayers pay 9.9 percent and the richest 1 percent only 7.4 percent of their income in state and local taxes.
High levels of regressive sales and property taxes (paid by all working families) result in higher state and local tax rates that the poorest households face. The refundable state EITC is one of the most effective and targeted tax reduction strategies to help offset these regressive taxes and is one of several policy options that states can use to add progressivity to their tax system.
Refunds are an important component of state EITCs because they ensure that workers and their families receive the full benefit of the credit. Refundable credits are independent of the amount of income tax paid; conversely, if the credit exceeds the income tax liability, the taxpayer receives the excess amount as a refund. In this way, refundable credits can usefully offset regressive sales and property taxes and provide much-needed income growth to help families pay for their basic needs. This is important because the majority of state and local taxes for low-income families come from sales and property taxes, not income taxes.
To date, nearly two-thirds of states (31 states plus the District of Columbia and the District of Puerto Rico) offer the EITC based on the federal credit (see Appendix). With a few exceptions (California, Minnesota, and Washington), most taxpayers count the state EITC as a percentage of the federal credit. This method of tying state credits to the federal amount makes it easier for taxpayers to claim the credit (because they already have the federal credit amount calculated) and simpler for state tax administrators. However, there are advantages to stripping away aspects of the federal credit to help strengthen benefits for workers without children at home, immigrants who file with Individual Taxpayer Identification Numbers (ITINs) and very low-income families.
Quiz & Worksheet
States vary dramatically in the generosity of their loans. The EITC provided by the District of Columbia, for example, is 70 percent of the federal credit for most eligible families this year and will increase to 100 percent of the federal amount by 2026 (matching their current 100 percent credit for workers without dependents). The DC portion of the EITC is available to recipients in monthly installments.
Meanwhile, six states (Delaware, Louisiana, Michigan, Montana, Oklahoma, and Oregon) have refundable loans that are less than 10 percent of the federal loan. Four states (Missouri, Ohio, South Carolina, and Utah) only allow a nonrefundable credit, limiting the credit’s ability to offset regressive state and local taxes. Delaware and Virginia both offer partial refunds, which give taxpayers the option of choosing between a refundable or non-refundable credit.
There are several best practices that states can explore to increase the impact of their EITC: full refunds, larger matching percentages, expanding eligibility to ITIN filers, relaxing age limits for eligible claimants, increasing the credit to very low-income families, and monthly payment options. These actions will help address the basic needs of families by eliminating disparities by race and wealth, removing some of the regressiveness of state and local tax systems. Whether it’s enacting the EITC in states that don’t yet have it or expanding the existing credit to workers trying to get low-wage jobs, lawmakers should continue to pass and strengthen state EITCs.
States continued the recent trend of promoting the EITC in 2022, with nine states and the District of Columbia establishing or improving their credits. Utah adopted a 15 percent nonrefundable EITC, while the District of Columbia, Hawaii, Illinois, Maine, Vermont and Virginia expanded existing credits. Meanwhile, Connecticut, New York, and Oregon offered one-time benefits to their EITC-eligible populations.
Don’t Miss Out! New Jersey Earned Income Tax Credit (njeitc)
In 2021, the District of Columbia and Washington State demonstrated the EITC’s best practices. DC sets the standard for increasing and extending state credits to exceed the federal EITC (100 percent of the federal credit with ITIN and Extended Earnings Eligibility). Washington State, which has no state income tax, modeled the Working Families Tax Credit after the federal EITC and enhanced it with additional improvements: effectively eliminating the phase-out for immigrant families and qualifying families with any income. the full value of the government loan. The state has had an EITC on the books since 2008, but lawmakers have taken steps to improve its structure and fully fund its implementation.
Individual Taxpayer Identification Numbers (ITINs) are tax processing numbers issued to certain immigrants, their spouses, and their dependents without Social Security numbers. This allows these noncitizens who live, work, or invest in the United States to pay local, state, and federal taxes, but they are excluded from government benefits, including the federal EITC. in response